UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-21905
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First Trust/Aberdeen Emerging Opportunity Fund
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
registrant's telephone number, including area code: (630) 765-8000
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Date of fiscal year end: December 31
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Date of reporting period: December 31, 2015
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST
ANNUAL
REPORT
FOR THE YEAR ENDED
DECEMBER 31, 2015
FIRST TRUST/
ABERDEEN
EMERGING
OPPORTUNITY
FUND
(FEO)
ABERDEEN
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TABLE OF CONTENTS
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FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
ANNUAL REPORT
DECEMBER 31, 2015
Shareholder Letter.......................................................... 1
At a Glance................................................................. 2
Portfolio Commentary........................................................ 4
Portfolio of Investments.................................................... 8
Statement of Assets and Liabilities......................................... 17
Statement of Operations..................................................... 18
Statements of Changes in Net Assets......................................... 19
Statement of Cash Flows..................................................... 20
Financial Highlights........................................................ 21
Notes to Financial Statements............................................... 22
Report of Independent Registered Public Accounting Firm..................... 29
Additional Information...................................................... 30
Board of Trustees and Officers.............................................. 34
Privacy Policy.............................................................. 36
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 objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of 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.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's web page at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. 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 material risks of investing in the
Fund are spelled out in the prospectus, the statement of additional information,
this report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
DECEMBER 31, 2015
Dear Shareholders:
Thank you for your investment in First Trust/Aberdeen Emerging Opportunity Fund
(the "Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with this
annual report which contains detailed information about your investment for the
12 months ended December 31, 2015, including a performance analysis and a market
outlook. Additionally, First Trust has compiled the Fund's financial statements
for you to review. We encourage you to read this report and discuss it with your
financial advisor.
While markets were up and down during 2015, we believe there are three important
things to remember: first, the U.S. economy grew, in spite of the massive
decline in oil prices; and second, the tapering that began in 2014 by the
Federal Reserve (the "Fed") did not stop growth in the U.S. economy either.
Finally, the long-anticipated rate hike by the Fed in December had little effect
on the money supply, and the stock market was not shocked by the hike. We remain
positive on U.S. markets, although we know that markets will always move up and
down.
First Trust believes that having a long-term investment horizon and being
invested in quality products can help you reach your goals, despite how the
market behaves. We have always maintained perspective about the markets and
believe investors should as well. We will continue to strive to provide quality
investments each and every day, which has been one of the hallmarks of our firm
since its inception nearly 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue to focus on helping
investors like you reach your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
"AT A GLANCE"
AS OF DECEMBER 31, 2015 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FEO
Common Share Price $13.06
Common Share Net Asset Value ("NAV") $15.34
Premium (Discount) to NAV (14.86)%
Net Assets Applicable to Common Shares $81,144,863
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) 10.72%
Current Distribution Rate on NAV (2) 9.13%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
12/14 $16.45 $18.59
16.54 18.53
16.50 18.58
16.48 18.76
17.00 19.19
1/15 16.69 18.74
16.79 18.97
17.09 19.11
16.91 19.11
2/15 17.03 19.19
16.90 18.83
16.24 18.29
16.13 18.44
3/15 16.25 18.40
17.04 19.22
16.92 19.18
4/15 16.92 19.31
16.66 19.14
16.83 19.25
16.95 19.43
16.57 19.24
5/15 16.44 18.82
16.13 18.44
16.11 18.44
16.19 18.51
6/15 15.80 18.22
15.99 18.14
15.64 17.94
15.76 18.09
15.39 17.64
7/15 15.36 17.64
14.86 17.38
14.64 17.13
13.81 16.48
8/15 13.74 16.49
13.54 16.08
13.68 16.13
13.76 16.36
9/15 13.21 15.60
13.26 15.78
13.81 16.56
14.01 16.63
14.13 16.59
10/15 13.94 16.39
14.03 16.48
13.61 16.15
14.05 16.51
11/15 13.87 16.20
13.70 16.09
13.05 15.45
13.30 15.62
13.10 15.46
12/15 13.06 15.34
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PERFORMANCE
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Average Annual Total Return
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1 Year Ended 5 Years Ended Inception (08/28/06)
12/31/15 12/31/15 to 12/31/15
FUND PERFORMANCE (3)
NAV -9.16% -0.26% 6.03%
Market Value -12.61% -2.14% 3.71%
INDEX PERFORMANCE
Blended Index(4) -8.90% -0.52% 5.12%
Barclays Capital Global Emerging Markets Index -0.18% 4.60% 6.42%
FTSE All World Emerging Market Index -15.22% -4.50% 3.43%
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% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
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Brazil Notas Do Tesouro Nacional Series F (BRL),
10%, 1/1/25 2.7%
Samsung Electronics Co., Ltd., Preference Shares, 0%, 2.4
Taiwan Semiconductor Manufacturing Co., Ltd., 0%, 1.9
Fomento Economico Mexicano, S.A.B. De C.V.,
ADR, 0%, 1.7
Russian Federal Bond - Ofz (RUB), 7.05%, 1/19/28 1.7
AIA Group Ltd, 0%, 1.7
Housing Development Finance Corp, 0%, 1.7
Mexican Bonos (MXN), 8.5%, 11/18/38 1.6
Astra International Tbk Pt, 0%, 1.6
Grupo Financiero Banorte, S.A.B. De C.V.,
O Shares, 0%, 1.5
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Total 18.5%
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% OF TOTAL
TOP 10 COUNTRIES(5) INVESTMENTS
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India 8.9%
Brazil 8.7
Mexico 8.7
Russia 6.7
Turkey 5.9
South Africa 5.1
Hong Kong 4.9
Indonesia 4.3
South Korea 3.1
Kazakhstan 3.0
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Total 59.3%
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(1) Most recent distribution paid or declared through 12/31/2015. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 12/31/2015. 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 Common Share for NAV
returns and changes in Common Share Price for market value returns. Total
returns do not reflect sales load and are not annualized for periods less
than one year. Past performance is not indicative of future results.
(4) Blended Index consists of the following: JPMorgan Emerging Markets Bond
Index - Global Diversified (32.5%); JPMorgan Government Bond Index -
Emerging Markets Diversified (32.5%); MSCI Emerging Markets Index (35.0%).
(5) Fixed-income portfolio securities are included in a country based upon
their underlying credit exposure as determined by Aberdeen Asset
Management Inc., the sub-advisor.
(6) The credit quality and ratings information presented above reflects the
ratings assigned by one or more nationally recognized statistical rating
organizations (NRSROs), including Standard & Poor's Rating Group, a
division of the McGraw-Hill Companies, Inc., Moody's Investors Service,
Inc., Fitch Ratings or a comparably rated NRSRO. For situations in which a
security is rated by more than one NRSRO and the ratings are not
equivalent, the highest ratings are used. The credit ratings shown relate
to the creditworthiness of the issuers of the underlying securities in the
Fund, and not to the Fund or its Shares. Credit ratings are subject to
change.
Page 2
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
"AT A GLANCE" (CONTINUED)
AS OF DECEMBER 31, 2015 (UNAUDITED)
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% OF TOTAL
INDUSTRY CLASSIFICATION INVESTMENTS
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Sovereigns 34.6%
Banks 11.7
Real Estate Management & Development 3.9
Food & Staples Retailing 3.4
Beverages 3.2
Construction Materials 3.1
Oil, Gas & Consumable Fuels 2.7
Wireless Telecommunications Services 2.6
Automobiles 2.4
Technology Hardware, Storage & Peripherals 2.4
Semiconductors 1.9
Exploration & Production 1.7
Insurance 1.7
Metals & Mining 1.7
Thrifts & Mortgage Finance 1.7
Real Estate 1.4
Tobacco 1.3
Integrated Oils 1.3
Transportation Infrastructure 1.2
IT Services 1.2
Government Agencies 1.2
Railroad 1.1
Financial Services 1.0
Diversified Financial Services 1.0
Hotels Restaurants & Leisure 0.9
Household Products 0.9
Specialty Retail 0.8
Energy Equipment & Services 0.8
Pharmaceuticals 0.7
Construction Materials Manufacturing 0.7
Consumer Services 0.6
Government Development Banks 0.6
Food & Beverage 0.6
Food Products 0.5
Multiline Retail 0.5
Consumer Finance 0.5
Software & Services 0.4
Pipeline 0.4
Oil & Gas Services & Equipment 0.4
Wireline Telecommunications Services 0.3
Chemicals 0.3
Refining & Marketing 0.3
Home Improvement 0.2
Supermarkets & Pharmacies 0.2
Industrial Other 0.0*
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Total 100.0%
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* Amount is less than 0.05%.
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% OF TOTAL
CREDIT QUALITY(6) INVESTMENTS
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A 9.3%
BBB+ 2.7
BBB 12.5
BBB- 26.6
BB+ 7.9
BB 1.7
BB- 9.7
B+ 12.6
B 8.1
B- 1.3
CCC 1.0
NR 6.6
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Total 100.0%
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Page 3
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PORTFOLIO COMMENTARY
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FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
ANNUAL REPORT
DECEMBER 31, 2015 (UNAUDITED)
SUB-ADVISOR
Aberdeen Asset Management Inc. ("Aberdeen" or the "Sub-Advisor"), a Securities
and Exchange Commission registered investment advisor, is a wholly-owned
subsidiary of Aberdeen Asset Management PLC ("Aberdeen Group"). Aberdeen Group
is a publicly-traded international investment management group listed on the
London Stock Exchange, managing assets for both institutional and retail clients
from offices around the world.
PORTFOLIO MANAGEMENT TEAM
Investment decisions for the First Trust/Aberdeen Emerging Opportunity Fund (the
"Fund") are made by Aberdeen using a team approach and not by any one
individual. By making team decisions, Aberdeen seeks to ensure that the
investment process results in consistent returns across all portfolios with
similar objectives. Aberdeen does not employ separate research analysts.
Instead, Aberdeen's investment managers combine analysis with portfolio
management. Each member of the team has sector and portfolio responsibilities
such as day-to-day monitoring of liquidity. The overall result of this matrix
approach is a high degree of cross-coverage, leading to a deeper understanding
of the securities in which Aberdeen invests. Below are the members of the team
with significant responsibility for the day-to-day management of the Fund's
portfolio.
EQUITY MANAGEMENT TEAM
DEVAN KALOO
Head of Global Emerging Markets Equity
JOANNE IRVINE
Head of Global Emerging Markets ex Asia
MARK GORDON-JAMES
Senior Investment Manager, Global Emerging Markets Equity
FIONA MANNING
Senior Investment Manager, Global Emerging Markets Equity
PETER TAYLOR
Senior Investment Manager/Head of Corporate Governance,
Global Emerging Markets Equity
FIXED-INCOME MANAGEMENT TEAM
BRETT DIMENT
Head of Emerging Market Debt
KEVIN DALY
Senior Investment Manager, Emerging Market Debt
EDWIN GUTIERREZ
Head of Emerging Market Sovereign Debt
MAX WOLMAN
Senior Investment Manager, Emerging Market Debt
COMMENTARY
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
The investment objective of the Fund is to provide a high level of total return.
The Fund pursues its investment objective by investing at least 80% of its
managed assets in a diversified portfolio of equity and fixed-income securities
of issuers in emerging market countries. There can be no assurance that the
Fund's investment objective will be achieved, and the Fund may not be
appropriate for all investors.
FUND RECAP
The Fund had a net asset value ("NAV") total return(1) of -9.16% and a market
value total return of -12.61% for the year ended December 31, 2015, compared to
the Fund's blended index(2) total return of -8.90% over the same period. In
addition to the blended index, the Fund currently uses other indexes for
comparative purposes. The total returns for the year ended December 31, 2015,
for these indexes were as follows: the Barclays Capital Global Emerging Markets
Index was -0.18% and the FTSE All World Emerging Market Index was -15.22%.
An important factor impacting the return of the Fund relative to the indexes was
the Fund's use of financial leverage through the use of bank borrowings. The
Fund uses leverage because its managers believe that, over time, leverage
provides opportunities for additional income and total return for common
shareholders. However, the use of leverage can also expose common shareholders
to additional volatility. For example, as the prices of securities held by the
Fund decline, the negative impact of the valuation 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 Global Emerging Markets Index, the FTSE All World Emerging
Market Index and the components of the blended index are not leveraged. Leverage
had a negative impact on the performance of the Fund over this reporting period.
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(1) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in NAV per share for NAV
returns and changes in Common Share Price for market value returns. Total
returns do not reflect sales load and are not annualized for periods less
than one year. Past performance is not indicative of future results.
(2) The blended index consists of the following: JPMorgan Emerging Markets
Bond Index - Global Diversified (32.5%); JPMorgan Government Bond Index -
Emerging Markets Diversified (32.5%); MSCI Emerging Markets Index (35.0%).
Page 4
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
ANNUAL REPORT
DECEMBER 31, 2015 (UNAUDITED)
FIXED INCOME COMMENTARY
MARKET RECAP
It has been a challenging 12 months for emerging markets ("EM") debt. A number
of geopolitical and macroeconomic events contributed to risk-adverse conditions,
causing retail fund outflows throughout the year except in October, when EM debt
rallied across the board, as risk-on sentiment took hold of the market. A
combination of the U.S. Federal Reserve (the "Fed") holding off on interest rate
hikes, better economic data from China and the possibility of further
policy-easing by the European Central Bank ("ECB") drove positive returns.
However, EM debt gave back some of its gains in November and December, in the
run up to the Fed finally raising rates.
Events in the U.S. were a strong driver of EM performance over the period, as a
strong U.S. dollar pushed EM currencies to all-time lows and the continuing
"will-they-won't-they" saga relating to the hiking of U.S. interest rates
spooked markets. Disappointing employment data quickly ruled out the possibility
of a June hike. Market conjecture then pointed to September but the Federal Open
Market Committee ("FOMC") meeting came and went with the announcement the Fed
would not yet be hiking rates. Following hawkish indications, the FOMC finally
confirmed in December that it would raise its target rate by 25 basis points,
seven years after cutting to the zero lower bound.
In Europe, the announcement and subsequent initiation of the ECB's quantitative
easing program caused Eurozone bonds to outperform in the first quarter. The
positive performance in emerging Europe was short-lived, however, as financial
turmoil in Greece heightened risk-off sentiment. Greece finally reached an
agreement with its European creditors in July though problems still exist. At
the end of the year, the ECB, under-delivered with its expanded stimulus
package, as the pace of quantitative easing bond purchases was not increased nor
was the yield floor on purchases removed. Elsewhere, the People's Bank of China
(PBoC) eased policy yet again by cutting the Reserve Requirement Ratio by 50
basis points and its benchmark rates by 25 basis points. Oil prices were also a
key driver of returns, as the Organization of the Petroleum Exporting Countries
("OPEC") declined to cut production which caused both West Texas Intermediate
("WTI") and Brent crude to fall by over 16% to end the year around U.S. $37 per
barrel.
Elsewhere in Europe, Russia had a mixed year. The beginning of 2015 was
characterized by economic volatility within the country, as the Russian Central
Bank cut its policy interest rate by 300 basis points to 14%. This followed an
emergency meeting in December, where rates were raised by 650 basis points.
Russia's credit rating was cut to junk status by both Standard & Poor's and
Moody's, with both agencies keeping a negative outlook on the country. The
contraction of the country's economy - though softer than expected - accelerated
in the second quarter with poor industrial output and retail sales. Despite some
positive statements from the central bank and some encouraging data, Russia's
contraction appeared to continue in the third quarter.
News flow towards the end of the period was dominated by central bank activity
in China. With its economy showing continued signs of a slowdown, at the start
of the month, the Chinese government devalued the renminbi by a record 1.90%,
spurring investors to drive the currency to its lowest level in nearly three
years. This currency depreciation coupled with weak economic data brought chaos
to equity markets, in turn prompting policy makers to take action and cut
interest rates by 25 basis points, in a bid to calm the storm. In November, it
was announced that the renminbi will be included in the International Monetary
Fund's Special Drawing Rights basket of currencies beginning in October 2016.
While the direct impact of inclusion will be minimal, it confirms China's
ongoing commitment to liberalizing its capital account and may result in some
gradual managed depreciation over the medium term.
Brazil has had a particularly difficult year, culminating with credit ratings
agency, Standard & Poor's, downgrading its sovereign rating and with it $56
billion of corporate debt, which dropped out of the investment grade index
causing a flurry of index-related forced selling. In response to the downgrade,
Brazil's central bank announced that it would "use all available instruments" to
arrest the continued depreciation of the Brazil real against the U.S. dollar.
There were two pieces of favorable news at the end of September, as Petrobras,
the state-controlled oil company, increased its petrol and diesel prices by 6%
and 4%, respectively, which will help it reclaim some losses from the recent
Brazilian real depreciation.
PERFORMANCE ANALYSIS
For the year, the EM debt portion of the Fund outperformed the EM debt portion
of its blended index in hard currency but not in local currency bonds.
Within the hard currency space, the Fund's overweight positions in Russia,
Kazakhstan and Argentina were the key positive contributors to performance, as
were off-index holdings in the United Arab Emirates and selection effects in
Venezuela. On the other side, an underweight position in Colombia detracted from
performance as did underweight positions in China, Hungary and the Philippines,
while an underweight for most of the year in Ukraine also detracted from the
Fund's performance.
Page 5
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
ANNUAL REPORT
DECEMBER 31, 2015 (UNAUDITED)
Within the local currency holdings, underweight positions in South Africa and
Malaysia benefited the Fund as did bond selection in Russia and an underweight
in Peru. Overweight positioning in Brazil was the main detractor from
performance as was currency exposure in Colombia and an underweight in Turkey.
MARKET AND FUND OUTLOOK
EM have had another tough year as external factors - most notably when U.S.
monetary policy would be tightened - guided sentiment against the asset class.
It should be noted though that aggregate hard currency sovereign and corporate
bonds had positive returns, while local currency rates all avoided losses over
2015 - it was in EM where the most pain was felt. The key is that many more EM
countries have free-floating exchange rates compared to the U.S. dollar pegs of
the past, which have allowed currencies to become the favored "venting
mechanism" for the markets to express a negative view. We believe there are some
benefits to this: it contains volatility in hard currency spreads and local
currency yields, and on a fundamental level improves balance of payments
positions by boosting export competitiveness and increasing imports costs.
Ultimately, EM currencies will stabilize, which means that local currency bonds
in U.S. dollar terms could become a better performing asset class in the coming
years.
Looking ahead, we believe the key risks for EM in the coming year will be the
pace of U.S. rate hikes and concerns about Chinese growth that could prompt
renewed fears of currency weakness. In the absence of any inflation surprises,
we would expect a more moderate pace of U.S. rate hikes to be generally
supportive for higher yielding assets. Concerns about China are likely to
persist at times, but we believe further stimulus will help prevent a sharp
slowdown in growth, and that officials will seek to stem currency volatility in
what is still a tightly managed exchange rate.
EQUITY COMMENTARY
MARKET RECAP
It was a challenging year for EM equities, which ended the year lower in U.S.
dollar terms. At first, markets were relatively resilient, even staging a rally
in the first quarter of 2015, on a wave of global monetary easing. But
eventually, sentiment was battered by plummeting commodity prices, Greece's
protracted financial crisis and renewed concerns over China's economic slowdown.
Most EM currencies depreciated against the U.S. dollar. The Fed's mixed signals
on interest rates throughout the year added to uncertainty. By the time the Fed
finally raised rates in December, however, market reaction was muted: the impact
of a rate hike had already largely been priced in. Investors were also somewhat
reassured by the Fed's emphasis on a gradual pace of rate hikes in 2016.
China was firmly in the limelight. Mainland shares rose sharply, fueled by
feverish speculation, before tumbling after a crackdown on margin trading.
Following a raft of data pointing to a deepening slowdown in the economy, the
central bank unexpectedly devalued its currency, sparking investor concerns of a
currency war. Despite the volatility, stocks in China and Hong Kong were among
the best performers, buttressed by stimulus efforts. Elsewhere in Asia, receding
inflation gave central banks the leeway to unveil measures to boost growth.
Indonesia announced a series of stimulus packages, including an electricity
tariff cut and a new minimum wage formula linked to inflation and real GDP. The
Reserve Bank of India cut interest rates four times, providing a welcome boost
to sentiment and the economy's nascent recovery.
Brazil led the weakness in Latin America. The real sank to a record low against
the dollar after the nation lost its investment-grade credit rating in a
surprise downgrade by Standard & Poor's. Dissatisfaction over the deteriorating
growth outlook and the unfolding Petrobras corruption scandal culminated in mass
demonstrations calling for President Dilma Rousseff's impeachment. Chile, a net
oil importer, benefited amid the weakness in energy markets, although concerns
persisted over the government's proposed reforms. Meanwhile, Mexico was
supported by relatively resilient GDP growth driven by domestic consumption.
In emerging Europe, Hungary outperformed its regional counterparts, as its
currency held up well against the U.S. dollar and GDP growth outpaced the
eurozone. The nation is expected to regain its investment-grade status in 2016.
Gains were pared by Russia and Turkey, however. Along with the raft of
international sanctions for its incursion into Ukraine, weak commodity prices
and fiscal austerity, driven by declining tax revenues, deepened Russia's
recession. Despite better-than-expected economic growth in Turkey, investors
remained wary of domestic political uncertainty, as well as Russian sanctions in
response to the downing of a warplane.
PERFORMANCE ANALYSIS
The equity portion of the Fund outperformed the equity portion of the blended
index over the year, largely owing to positive stock selection. The currency
effect was negative as emerging market currencies broadly depreciated against
the U.S. dollar, which rose amid expectations of an impending increase in
interest rates.
Page 6
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
ANNUAL REPORT
DECEMBER 31, 2015 (UNAUDITED)
Good stock selection in Latin America compensated for market weakness. In
Mexico, airport operator Asur continued to rally, driven by consistent growth in
passenger traffic, while bottler and convenience store operator Femsa rose on
the back of acquisitions in its pharmacy business. However, the overweight to
Brazil pared gains. Brazilian equities tumbled and the real continued to
depreciate, owing to heightened concerns over president Rousseff's commitment to
fiscal discipline and S&P's downgrade of the nation's debt. Iron ore producer
Vale's shares fell following an accident at Samarco, its joint-venture operation
with BHP Billiton. The company has handled communication with its investors
well, but there remains significant concern over the magnitude of the potential
fines the company faces, while the environment of low iron ore prices will
compound difficulties.
The exposure to Europe, Middle East and Africa ("EMEA") was also positive. In
particular, shares of South African beverage company SABMiller rallied on news
of a potential takeover bid from rival brewer ABI. In Poland, food retailer
Jeronimo Martins continued to do well, as its results demonstrated operational
improvements. Hungarian drug-maker Richter Gedeon's earnings were boosted by a
milestone payment on its anti-psychotic treatment, Cariprazine, from the
company's U.S. partner, Allergan.
In Asia, the underweight to China continued to hamper performance. Chinese
stocks rose sharply in the beginning of the year, in response to a tide of
equity account openings, a surge in margin trading activity, and monetary
easing. Although weak economic data reversed gains in the second half, the MSCI
China Index still ended the year among the best-performing markets. Currency
returns were also negative: while the yuan weakened against the U.S. dollar, it
appreciated against most major global currencies in 2015. At the stock level,
not holding the internet company Tencent was the largest detractor from Fund
performance, as its share price rose after it announced good results and planned
to monetise its WeChat platform. We do not hold Tencent due to concerns over
corporate governance. In particular, its variable interest entity ("VIE")
structure, which is used to get around legal restrictions on the foreign
ownership of internet assets in China, offers limited protection to minority
shareholders. On the other hand, our non-blended index exposure to Hong Kong
benefited the Fund, as AIA posted better-than-expected results. It delivered
double-digit growth in new business value on a constant currency basis in all
markets except Korea. We also benefited from our overweight to India, which was
among the most resilient markets.
MARKET OUTLOOK
The Fed's move to finally raise interest rates, while emphasizing that any
future adjustments will be gradual, has brought welcome clarity to investors.
The hope is that focus can now somewhat return to fundamentals. On the whole, we
believe EMs are better positioned for higher interest rates than they were
during the 2013 'taper tantrum', thanks to improved external balances and higher
reserves. That said, the pace of U.S. interest rate hikes will be closely
watched in 2016. A steeper-than-expected interest rate trajectory would be a key
risk for developing markets, especially if this causes the U.S. dollar to
strengthen drastically against EM currencies. This would weigh most on the
nations that have borrowed heavily in U.S. dollars, including Brazil, Russia and
Turkey, as their debt burdens would increase in local currency terms.
Another driver of sentiment is likely to be the slowdown in China, as it
restructures an export- and investment-led economy towards a more sustainable
model with consumption and services as its main growth pillars. While this is a
good thing in the longer term, the knock-on impact on commodity prices may spell
trouble for emerging market exporters. With major oil players continuing to ramp
up production, short-term prospects for the energy sector appear challenging.
The developing economies that made use of the boom years to strengthen their
current account balances and increase productivity are better-placed to weather
the 'new normal' of lower levels of trade and investment.
Against this backdrop, we continue to find opportunity amid the market
volatility, and are upbeat on EMs' long-term potential. Negative investor
sentiment has punished share prices indiscriminately and valuations now look
reasonable both on a historical as well as relative basis. We also expect
corporate earnings to improve modestly in 2016. Many companies are working to
maintain or grow margins, which we believe should position them for an earnings
recovery. Most of our holdings are market leaders that have done well despite a
difficult operating environment. We remain confident in their prospects.
Page 7
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a)
DECEMBER 31, 2015
SHARES DESCRIPTION VALUE
-------------- ----------------------------------------------------------------------------------------- ------------
COMMON STOCKS - 51.1%
AUSTRALIA - 0.0%
15,636 South32 Ltd. (b) (c)..................................................................... $ 12,178
------------
BRAZIL - 3.9%
148,779 Banco Bradesco S.A., ADR................................................................. 715,627
31,000 BRF S.A.................................................................................. 434,098
100,000 Lojas Renner S.A......................................................................... 432,228
30,454 Multiplan Empreendimentos Imobiliarios S.A., Preference Shares........................... 292,512
58,267 Ultrapar Participacoes S.A............................................................... 890,298
84,104 Vale S.A., ADR........................................................................... 276,702
58,842 Vale S.A., Preference Shares, ADR........................................................ 150,047
------------
3,191,512
------------
CHILE - 0.7%
30,459 Banco Santander Chile S.A., ADR.......................................................... 537,297
------------
CHINA - 2.3%
115,000 China Mobile Ltd. (c).................................................................... 1,294,452
862,000 PetroChina Co., Ltd., Class H (c)........................................................ 564,301
------------
1,858,753
------------
HONG KONG - 4.8%
247,000 AIA Group Ltd. (c)....................................................................... 1,475,846
202,000 Hang Lung Group Ltd. (c)................................................................. 655,069
16,800 Hong Kong Exchanges and Clearing Ltd. (c)................................................ 427,977
528,000 Swire Pacific Ltd., B Shares (c)......................................................... 1,074,246
89,600 Swire Properties Ltd. (c)................................................................ 257,630
------------
3,890,768
------------
HUNGARY - 0.8%
33,000 Richter Gedeon Nyrt (c).................................................................. 622,859
------------
INDIA - 8.8%
17,000 Grasim Industries Ltd. (c)............................................................... 962,968
18,500 Hero MotoCorp Ltd. (c)................................................................... 750,683
57,000 Hindustan Unilever Ltd. (c).............................................................. 742,844
75,500 Housing Development Finance Corp., Ltd. (c).............................................. 1,435,998
200,000 ICICI Bank Ltd. (c)...................................................................... 789,947
60,472 Infosys Ltd. (c)......................................................................... 1,007,678
231,173 ITC Ltd. (c)............................................................................. 1,143,108
7,428 UltraTech Cement Ltd. (c)................................................................ 311,400
------------
7,144,626
------------
INDONESIA - 2.3%
3,083,100 Astra International Tbk PT (c)........................................................... 1,328,053
316,300 Indocement Tunggal Prakarsa Tbk PT (c)................................................... 507,221
------------
1,835,274
------------
ITALY - 0.8%
27,900 Tenaris S.A., ADR........................................................................ 664,020
------------
MALAYSIA - 0.9%
234,167 CIMB Group Holdings Bhd (c).............................................................. 246,902
120,000 Public Bank Bhd (c)...................................................................... 517,058
------------
763,960
------------
Page 8 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
DECEMBER 31, 2015
SHARES DESCRIPTION VALUE
-------------- ----------------------------------------------------------------------------------------- ------------
COMMON STOCKS (CONTINUED)
MEXICO - 4.7%
16,200 Fomento Economico Mexicano, S.A.B. de C.V., ADR.......................................... $ 1,496,070
26,500 Grupo Aeroportuario del Centro Norte, S.A.B. de C.V., ADR................................ 1,018,925
238,200 Grupo Financiero Banorte, S.A.B. de C.V., O Shares....................................... 1,310,242
------------
3,825,237
------------
PHILIPPINES - 2.1%
1,400,000 Ayala Land, Inc. (c)..................................................................... 1,023,361
394,359 Bank of the Philippine Islands (c)....................................................... 702,387
------------
1,725,748
------------
POLAND - 0.8%
18,196 Bank Pekao S.A. (c)...................................................................... 664,569
------------
PORTUGAL - 0.7%
41,692 Jeronimo Martins SGPS S.A. (c)........................................................... 542,515
------------
RUSSIA - 2.1%
26,500 Lukoil PJSC, ADR......................................................................... 860,853
5,181 Magnit PJSC (c).......................................................................... 796,282
------------
1,657,135
------------
SOUTH AFRICA - 3.5%
26,000 BHP Billiton PLC (c)..................................................................... 291,141
48,610 Massmart Holdings Ltd. (c)............................................................... 314,689
40,215 MTN Group Ltd. (c)....................................................................... 346,426
19,978 SABMiller PLC (c)........................................................................ 1,204,259
119,729 Truworths International Ltd. (c)......................................................... 705,803
------------
2,862,318
------------
SOUTH KOREA - 3.2%
3,500 E-Mart, Inc. (c)......................................................................... 561,608
2,220 Samsung Electronics Co., Ltd., Preference Shares (c)..................................... 2,052,142
------------
2,613,750
------------
TAIWAN - 2.5%
150,005 Taiwan Mobile Co., Ltd. (c).............................................................. 455,545
368,954 Taiwan Semiconductor Manufacturing Co., Ltd. (c)......................................... 1,591,757
------------
2,047,302
------------
THAILAND - 2.0%
67,700 Siam Cement Public (The) Co., Ltd. (c)................................................... 854,429
230,600 Siam Commercial Bank Public Co., Ltd. (c)................................................ 760,668
------------
1,615,097
------------
TURKEY - 2.5%
188,635 Akbank TAS (c)........................................................................... 432,544
40,444 BIM Birlesik Magazalar AS (c)............................................................ 711,901
146,150 Haci Omer Sabanci Holding AS (c)......................................................... 414,308
192,000 Turkiye Garanti Bankasi AS (c)........................................................... 467,744
------------
2,026,497
------------
UNITED KINGDOM - 0.7%
70,040 Standard Chartered PLC (c)............................................................... 581,132
------------
UNITED STATES - 1.0%
10,500 Yum! Brands, Inc......................................................................... 767,025
------------
TOTAL COMMON STOCKS...................................................................... 41,449,572
(Cost $38,381,674) ------------
See Notes to Financial Statements Page 9
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
DECEMBER 31, 2015
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- ------------------------------------------------------------- ---------- -------------- ------------
FOREIGN SOVEREIGN BONDS AND NOTES - 41.2%
ANGOLA - 0.3%
227,000 Angolan Government International Bond
(USD) (d)................................................. 9.50% 11/12/25 $ 211,678
------------
ARGENTINA - 2.5%
750,000 Argentina Bonar Bonds (USD).................................. 7.00% 04/17/17 760,584
476,693 Argentine Republic Government International Bond
(USD) (e)................................................. 8.28% 12/31/33 537,471
630,917 Argentine Republic Government International Bond
(USD) (e)................................................. 8.28% 12/31/33 728,709
------------
2,026,764
------------
ARMENIA - 0.5%
396,000 Armenia International Bond (USD) (d)......................... 6.00% 09/30/20 385,795
------------
BRAZIL - 3.4%
1,800,000 Brazil Notas do Tesouro Nacional, Series F (BRL)............. 10.00% 01/01/17 433,397
12,710,000 Brazil Notas do Tesouro Nacional, Series F (BRL)............. 10.00% 01/01/25 2,300,519
------------
2,733,916
------------
CHILE - 0.3%
250,000 Empresa Nacional del Petroleo (USD) (d)...................... 4.38% 10/30/24 240,621
------------
COLOMBIA - 0.5%
833,000,000 Colombia Government International Bond (COP)................. 7.75% 04/14/21 268,963
344,000,000 Colombia Government International Bond (COP)................. 9.85% 06/28/27 124,239
------------
393,202
------------
COSTA RICA - 0.3%
300,000 Costa Rica Government International Bond (USD)............... 4.25% 01/26/23 264,000
------------
DOMINICAN REPUBLIC - 1.1%
200,000 Dominican Republic International Bond (USD).................. 7.50% 05/06/21 215,000
141,000 Dominican Republic International Bond (USD).................. 5.88% 04/18/24 141,000
458,000 Dominican Republic International Bond (USD).................. 8.63% 04/20/27 534,715
------------
890,715
------------
EGYPT - 0.6%
540,000 Egypt Government International Bond (USD) (d)................ 5.88% 06/11/25 470,043
------------
ETHIOPIA - 0.9%
790,000 Ethiopia International Bond (USD) (d)........................ 6.63% 12/11/24 703,416
------------
GABON - 0.2%
200,000 Gabon Government International Bond (USD) (d)................ 6.95% 06/16/25 159,778
------------
GEORGIA - 0.4%
350,000 Georgian Oil and Gas Corp. JSC (USD) (d)..................... 6.88% 05/16/17 356,090
------------
GHANA - 0.6%
300,000 Ghana Government International Bond (USD).................... 8.13% 01/18/26 235,500
350,000 Ghana Government International Bond (USD) (d)................ 8.13% 01/18/26 274,750
------------
510,250
------------
HONDURAS - 0.8%
630,000 Honduras Government International Bond (USD) (d)............. 7.50% 03/15/24 666,225
------------
HUNGARY - 1.2%
239,730,000 Hungary Government Bond (HUF)................................ 5.50% 06/24/25 969,111
------------
Page 10 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
DECEMBER 31, 2015
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- ------------------------------------------------------------- ---------- -------------- ------------
FOREIGN SOVEREIGN BONDS AND NOTES (CONTINUED)
INDONESIA - 2.3%
470,000 Indonesia Government International Bond (USD) (d)............ 5.88% 01/15/24 $ 504,693
7,000,000,000 Indonesia Treasury Bond (IDR)................................ 5.25% 05/15/18 470,155
7,311,000,000 Indonesia Treasury Bond (IDR)................................ 8.38% 03/15/34 498,872
440,000 Pertamina Persero PT (USD) (d)............................... 4.30% 05/20/23 401,095
------------
1,874,815
------------
IRAQ - 0.7%
880,000 Iraq International Bond (USD)................................ 5.80% 01/15/28 596,209
------------
IVORY COAST - 0.9%
240,000 Ivory Coast Government International Bond (USD) (d).......... 6.38% 03/03/28 219,590
570,000 Ivory Coast Government International Bond (USD).............. 5.75% 12/31/32 509,848
------------
729,438
------------
JAMAICA - 0.6%
477,000 Jamaica Government International Bond (USD).................. 7.88% 07/28/45 465,075
------------
KAZAKHSTAN - 2.2%
670,000 Kazakhstan Government International Bond (USD) (d)........... 3.88% 10/14/24 631,475
480,000 KazMunayGas National Co., JSC (USD).......................... 9.13% 07/02/18 529,661
603,000 KazMunayGas National Co., JSC (USD).......................... 7.00% 05/05/20 640,189
------------
1,801,325
------------
KENYA - 0.2%
200,000 Kenya Government International Bond (USD).................... 6.88% 06/24/24 176,000
------------
MEXICO - 2.9%
7,800,000 Mexican Bonos (MXN).......................................... 6.50% 06/09/22 466,827
7,370,000 Mexican Bonos (MXN).......................................... 7.50% 06/03/27 465,269
20,590,000 Mexican Bonos (MXN).......................................... 8.50% 11/18/38 1,409,569
------------
2,341,665
------------
MONGOLIA - 1.1%
580,000 Development Bank of Mongolia LLC (USD)....................... 5.75% 03/21/17 556,061
400,000 Mongolia Government International Bond (USD)................. 5.13% 12/05/22 319,647
------------
875,708
------------
POLAND - 1.9%
4,050,000 Poland Government Bond (PLN)................................. 4.75% 04/25/17 1,075,364
1,670,000 Poland Government Bond (PLN)................................. 4.00% 10/25/23 461,771
------------
1,537,135
------------
ROMANIA - 2.1%
3,300,000 Romania Government Bond (RON)................................ 5.80% 07/26/27 912,714
700,000 Romanian Government International Bond (USD)................. 6.75% 02/07/22 823,851
------------
1,736,565
------------
RUSSIA - 3.3%
34,200,000 Russian Federal Bond - OFZ (RUB)............................. 7.50% 03/15/18 450,222
129,026,000 Russian Federal Bond - OFZ (RUB)............................. 7.05% 01/19/28 1,480,883
200,000 Russian Foreign Bond - Eurobond (USD)........................ 4.88% 09/16/23 203,625
510,000 Vnesheconombank Via VEB Finance PLC (USD).................... 6.90% 07/09/20 517,647
------------
2,652,377
------------
See Notes to Financial Statements Page 11
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
DECEMBER 31, 2015
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- ------------------------------------------------------------- ---------- -------------- ------------
FOREIGN SOVEREIGN BONDS AND NOTES (CONTINUED)
RWANDA - 0.6%
300,000 Rwanda International Government Bond (USD)................... 6.63% 05/02/23 $ 287,401
200,000 Rwanda International Government Bond (USD) (d)............... 6.63% 05/02/23 191,601
------------
479,002
------------
SENEGAL - 0.5%
380,000 Senegal Government International Bond (USD).................. 8.75% 05/13/21 399,950
------------
SOUTH AFRICA - 1.8%
460,000 Eskom Holdings SOC Ltd. (USD)................................ 7.13% 02/11/25 400,200
210,000 Eskom Holdings SOC Ltd. (USD) (d)............................ 6.75% 08/06/23 183,225
6,813,023 South Africa Government Bond (ZAR)........................... 10.50% 12/21/26 466,184
7,860,000 South Africa Government Bond (ZAR)........................... 8.00% 01/31/30 431,529
------------
1,481,138
------------
TANZANIA - 0.3%
300,000 Tanzania Government International Bond (USD) (f)............. 6.54% 03/09/20 284,220
------------
TURKEY - 3.1%
1,600,000 Turkey Government Bond (TRY)................................. 6.30% 02/14/18 505,555
2,650,000 Turkey Government Bond (TRY)................................. 10.40% 03/20/24 896,387
1,050,000 Turkey Government International Bond (USD)................... 6.25% 09/26/22 1,143,345
------------
2,545,287
------------
UKRAINE - 0.7%
297,000 Ukraine Government International Bond (USD) (d).............. 7.75% 09/01/20 274,725
115,000 Ukraine Government International Bond (USD) (d).............. 7.75% 09/01/21 105,059
115,000 Ukraine Government International Bond (USD) (d).............. 7.75% 09/01/24 102,340
188,000 Ukraine Government International Bond (USD) (d).............. 0.00% 05/31/40 75,905
------------
558,029
------------
UNITED ARAB EMIRATES - 0.6%
410,000 Emirate of Dubai Government International Bonds (USD)........ 7.75% 10/05/20 497,562
------------
URUGUAY - 0.9%
183,000 Uruguay Government International Bond (USD).................. 7.63% 03/21/36 226,920
14,342,471 Uruguay Government International Bond, Inflation Adjusted
Bond (UYU) (g)............................................ 5.00% 09/14/18 479,681
------------
706,601
------------
VENEZUELA - 0.4%
810,000 Venezuela Government International Bond (USD)................ 7.75% 10/13/19 326,025
------------
ZAMBIA - 0.5%
510,000 Zambia Government International Bond (USD) (d)............... 8.97% 07/30/27 406,062
------------
TOTAL FOREIGN SOVEREIGN BONDS AND NOTES.................................................. 33,451,792
(Cost $38,981,483) ------------
FOREIGN CORPORATE BONDS AND NOTES (h) - 13.1%
BANGLADESH - 0.3%
250,000 Banglalink Digital Communications Ltd. (USD) (d)............. 8.63% 05/06/19 259,375
------------
BARBADOS - 0.3%
250,000 Sagicor Finance 2015 Ltd. (USD) (d).......................... 8.88% 08/11/22 273,125
------------
Page 12 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
DECEMBER 31, 2015
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- ------------------------------------------------------------- ---------- -------------- ------------
FOREIGN CORPORATE BONDS AND NOTES (h) (CONTINUED)
BRAZIL - 1.9%
520,000 Marfrig Overseas Ltd. (USD).................................. 9.50% 05/04/20 $ 512,200
350,000 OAS Finance Ltd. (USD) (d) (e) (i) (j)....................... 8.88% (k) 19,250
200,000 OAS Investments GmbH (USD) (d) (e) (i)....................... 8.25% 10/19/19 11,000
280,000 Petrobras Global Finance BV (USD)............................ 5.75% 01/20/20 220,500
610,000 Petrobras Global Finance BV (USD)............................ 5.38% 01/27/21 455,975
460,908 QGOG Atlantic/Alaskan Rigs Ltd. (USD)........................ 5.25% 07/30/18 318,027
------------
1,536,952
------------
CHINA - 0.3%
260,000 Future Land Development Holdings Ltd. (USD).................. 10.25% 07/21/19 281,838
------------
GEORGIA - 0.6%
480,000 Georgian Railway JSC (USD)................................... 7.75% 07/11/22 488,275
------------
GUATEMALA - 0.7%
200,000 Comcel Trust via Comunicaciones Celulares SA (USD) (d)....... 6.88% 02/06/24 155,000
400,000 Industrial Subordinated Trust (USD).......................... 8.25% 07/27/21 422,000
------------
577,000
------------
HONG KONG - 0.3%
260,000 Shimao Property Holdings Ltd. (USD).......................... 8.38% 02/10/22 279,712
------------
INDIA - 0.6%
270,000 ABJA Investment Co. Pte Ltd. (USD)........................... 5.95% 07/31/24 226,475
260,000 ICICI Bank Ltd. (USD) (j).................................... 6.38% 04/30/22 267,342
------------
493,817
------------
KAZAKHSTAN - 1.0%
480,000 Kazakhstan Temir Zholy (USD)................................. 6.38% 10/06/20 474,336
400,000 Zhaikmunai LLP (USD) (d)..................................... 7.13% 11/13/19 313,000
------------
787,336
------------
MEXICO - 1.6%
270,000 Alfa SAB de CV (USD)......................................... 6.88% 03/25/44 251,775
350,000 CEMEX Espana S.A. (USD)...................................... 9.88% 04/30/19 371,875
400,000 Sixsigma Networks Mexico S.A. de CV (USD) (d)................ 8.25% 11/07/21 384,000
290,000 Unifin Financiera SAPI de CV SOFOM ENR (USD)................. 6.25% 07/22/19 268,250
------------
1,275,900
------------
MOZAMBIQUE - 0.7%
637,000 EMATUM Via Mozambique EMATUM Finance 2020 BV
(USD)..................................................... 6.31% 09/11/20 533,360
------------
NIGERIA - 0.5%
400,000 Zenith Bank PLC (USD) (d).................................... 6.25% 04/22/19 363,024
------------
PARAGUAY - 0.4%
350,000 Banco Regional SAECA (USD) (d)............................... 8.13% 01/24/19 357,875
------------
PERU - 0.6%
160,000 InRetail Consumer (USD) (d).................................. 5.25% 10/10/21 161,600
103,000 Southern Copper Corp. (USD).................................. 3.88% 04/23/25 92,717
200,000 Union Andina de Cementos SAA (USD)........................... 5.88% 10/30/21 193,500
------------
447,817
------------
See Notes to Financial Statements Page 13
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
DECEMBER 31, 2015
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- ------------------------------------------------------------- ---------- -------------- ------------
FOREIGN CORPORATE BONDS AND NOTES (h) (CONTINUED)
RUSSIA - 1.8%
400,000 Alfa Bank OJSC Via Alfa Bond Issuance PLC (USD).............. 7.75% 04/28/21 $ 419,000
430,000 Evraz Group S.A. (USD) (d)................................... 6.50% 04/22/20 404,200
350,000 Lukoil International Finance BV (USD)........................ 4.56% 04/24/23 315,262
310,000 Sberbank of Russia Via SB Capital S.A. (USD)................. 6.13% 02/07/22 312,139
------------
1,450,601
------------
TURKEY - 0.6%
200,000 Arcelik AS (USD) (d)......................................... 5.00% 04/03/23 182,967
300,000 Yasar Holdings AS (USD) (d).................................. 8.88% 05/06/20 308,640
------------
491,607
------------
UNITED ARAB EMIRATES - 0.8%
600,000 Jafz Sukuk Ltd. (USD)........................................ 7.00% 06/19/19 671,520
------------
VENEZUELA - 0.1%
193,333 Petroleos de Venezuela S.A. (USD)............................ 8.50% 11/02/17 103,433
------------
TOTAL FOREIGN CORPORATE BONDS AND NOTES.................................................. 10,672,567
(Cost $11,687,793) ------------
TOTAL INVESTMENTS - 105.4%............................................................... 85,573,931
(Cost $89,050,950) (l)
OUTSTANDING LOANS - (7.1%)............................................................... (5,800,000)
NET OTHER ASSETS AND LIABILITIES - 1.7%.................................................. 1,370,932
------------
NET ASSETS - 100.0%...................................................................... $ 81,144,863
============
-----------------------------
(a) All of these securities are available to serve as collateral for the
outstanding loans.
(b) Non-income producing security.
(c) This security is fair valued by the Advisor's Pricing Committee in
accordance with procedures adopted by the Trust's Board of Trustees and in
accordance with provisions of the Investment Company Act of 1940, as
amended. At December 31, 2015, securities noted as such are valued at
$31,603,628 or 38.95% of net assets. Certain of these securities are fair
valued using a factor provided by an independent pricing service due to
the change in value between the foreign markets' close and the NYSE close
exceeding a certain threshold. On days when this threshold is not
exceeded, these securities are typically valued at the last sale price on
the exchange on which they are principally traded.
(d) 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 advisor. At December 31,
2015, securities noted as such amounted to $9,757,222 or 12.02% of net
assets.
(e) This issuer is in default and interest is not being accrued by the Fund.
(f) Floating rate security. The interest rate shown reflects the rate in
effect at December 31, 2015.
(g) 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.
(h) Portfolio securities are included in a country based upon their underlying
credit exposure as determined by Aberdeen Asset Management Inc., the
Fund's investment sub-advisor.
(i) This borrower has filed for protection in federal bankruptcy court.
(j) Fixed-to-floating or fixed-to-variable rate security. The interest rate
shown reflects the fixed rate in effect at December 31, 2015. At a
predetermined date, the fixed rate will change to a floating rate or a
variable rate.
(k) Perpetual maturity
(l) Aggregate cost for federal income tax purposes is $89,101,432. As of
December 31, 2015, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$12,577,696 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$16,105,197.
ADR American Depositary Receipt
Page 14 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2015
Currency Abbreviations:
ARS Argentine Peso INR Indian Rupee THB Thailand Baht
BRL Brazilian Real KRW South Korean Won TRY Turkish Lira
COP Colombian Peso MXN Mexican Peso TWD Taiwan New Dollar
EUR Euro MYR Malaysian Ringgit USD United States Dollar
GBP British Pound Sterling PHP Philippines Peso UYU Uruguayan Peso
HKD Hong Kong Dollar PLN Polish Zloty ZAR South African Rand
HUF Hungarian Forint RON Romanian Leu
IDR Indonesian Rupiah RUB Russian Ruble
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of December 31,
2015 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
12/31/2015 PRICES INPUTS INPUTS
--------------------------------------------------- ------------ ------------ -------------- ------------
Common Stocks:
Brazil........................................ $ 3,191,512 $ 3,191,512 $ -- $ --
Chile......................................... 537,297 537,297 -- --
Italy......................................... 664,020 664,020 -- --
Mexico........................................ 3,825,237 3,825,237 -- --
Russia........................................ 1,657,135 860,853 796,282 --
United States................................. 767,025 767,025 -- --
Other Country Categories*..................... 30,807,346 -- 30,807,346 --
------------ ------------ -------------- ------------
Total Common Stocks........................ 41,449,572 9,845,944 31,603,628 --
------------ ------------ -------------- ------------
Foreign Sovereign Bonds and Notes*................. 33,451,792 -- 33,451,792 --
Foreign Corporate Bonds and Notes*................. 10,672,567 -- 10,672,567 --
------------ ------------ -------------- ------------
Total Investments.................................. 85,573,931 9,845,944 75,727,987 --
------------ ------------ -------------- ------------
Forward Foreign Currency Contracts**............... 34,768 -- 34,768 --
------------ ------------ -------------- ------------
Total.............................................. $ 85,608,699 $ 9,845,944 $ 75,762,755 $ --
============ ============ ============== ============
* See Portfolio of Investments for country breakout.
** See the Forward Foreign Currency Contracts table 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. There were no
transfers between Levels at December 31, 2015.
See Notes to Financial Statements Page 15
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2015
FORWARD FOREIGN CURRENCY CONTRACTS (SEE NOTE 2C - FORWARD FOREIGN CURRENCY
CONTRACTS IN THE NOTES TO FINANCIAL STATEMENTS).
FORWARD FOREIGN CURRENCY CONTRACTS
-------------------------------------------------------------
PURCHASE SALE UNREALIZED
SETTLEMENT AMOUNT AMOUNT VALUE AS OF VALUE AS OF APPRECIATION
DATE COUNTERPARTY PURCHASED (a) SOLD (a) DECEMBER 31, 2015 DECEMBER 31, 2015 (DEPRECIATION)
------------ ------------ --------------------- ------------------- ----------------- ----------------- --------------
02/22/16 CIT ARS 4,641,000 USD 309,400 $ 339,935 $ 309,400 $ 30,535
02/22/16 CIT INR 62,674,000 USD 934,875 939,108 934,875 4,233
--------------
Net Unrealized Appreciation (Depreciation).................................................................. $ 34,768
==============
(a) Please see Portfolio of Investments for currency descriptions.
See Note 2D - Offsetting on the Statement of Assets and Liabilities in the Notes
to Financial Statements for a table that presents the forward foreign currency
contracts' assets and liability on a gross basis.
Counterparty Abbreviations:
CIT Citibank, NA
CURRENCY EXPOSURE % OF TOTAL
DIVERSIFICATION INVESTMENTS +
--------------------------------------------------
USD 40.6%
INR 9.4
HKD 6.7
BRL 5.6
ZAR 4.4
MXN 4.3
TRY 4.0
IDR 3.3
RUB 3.2
KRW 3.0
PLN 2.6
TWD 2.4
PHP 2.0
THB 1.9
HUF 1.9
RON 1.1
MYR 0.9
GBP 0.7
EUR 0.6
UYU 0.5
COP 0.5
ARS 0.4
--------------------------------------------------
Total 100.0%
======
+ The weightings include the impact of currency forwards.
Page 16 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2015
ASSETS:
Investments, at value
(Cost $89,050,950)............................................................................. $ 85,573,931
Cash.............................................................................................. 232,739
Foreign currency (Cost $226,159).................................................................. 225,832
Unrealized appreciation on forward foreign currency contracts..................................... 34,768
Receivables:
Interest....................................................................................... 989,230
Dividends...................................................................................... 101,678
Investment securities sold..................................................................... 74,685
Miscellaneous.................................................................................. 40,381
Dividend reclaims.............................................................................. 2,501
Prepaid expenses.................................................................................. 892
------------
Total Assets................................................................................... 87,276,637
------------
LIABILITIES:
Outstanding loan.................................................................................. 5,800,000
Payables:
Deferred foreign capital gains tax............................................................. 114,110
Investment advisory fees....................................................................... 75,612
Audit and tax fees............................................................................. 58,200
Custodian fees................................................................................. 40,939
Printing fees.................................................................................. 14,261
Administrative fees............................................................................ 12,470
Interest and fees on loan...................................................................... 6,022
Transfer agent fees............................................................................ 5,518
Legal fees..................................................................................... 1,433
Financial reporting fees....................................................................... 771
Trustees' fees and expenses.................................................................... 50
Other liabilities................................................................................. 2,388
------------
Total Liabilities.............................................................................. 6,131,774
------------
NET ASSETS........................................................................................ $ 81,144,863
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................... $ 84,782,817
Par value......................................................................................... 52,893
Accumulated net investment income (loss).......................................................... (43,233)
Accumulated net realized gain (loss) on investments, forward foreign currency
contracts and foreign currency transactions.................................................... (66,383)
Net unrealized appreciation (depreciation) on investments, forward foreign
currency contracts and foreign currency translation............................................ (3,581,231)
------------
NET ASSETS........................................................................................ $ 81,144,863
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share).............................. $ 15.34
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized)....... 5,289,339
============
See Notes to Financial Statements Page 17
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2015
INVESTMENT INCOME:
Interest (net of foreign withholding tax of $7,427)............................................... $ 3,789,188
Dividends (net of foreign withholding tax of $139,313)............................................ 1,253,633
------------
Total investment income........................................................................ 5,042,821
------------
EXPENSES:
Investment advisory fees.......................................................................... 1,000,417
Custodian fees.................................................................................... 183,361
Administrative fees............................................................................... 101,329
Audit and tax fees................................................................................ 68,432
Interest and fees on loan......................................................................... 67,272
Printing fees..................................................................................... 38,329
Transfer agent fees............................................................................... 33,190
Foreign capital gains tax......................................................................... 19,754
Trustees' fees and expenses....................................................................... 17,115
Legal fees........................................................................................ 12,425
Financial reporting fees.......................................................................... 9,250
Other............................................................................................. 40,196
------------
Total expenses................................................................................. 1,591,070
------------
NET INVESTMENT INCOME (LOSS)...................................................................... 3,451,751
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments.................................................................................... 274,534
Forward foreign currency contracts............................................................. 203,374
Foreign currency transactions.................................................................. (5,040,950)
------------
Net realized gain (loss).......................................................................... (4,563,042)
------------
Net change in unrealized appreciation (depreciation) on:
Investments.................................................................................... (9,039,270)
Forward foreign currency contracts............................................................. 92,697
Foreign currency translation................................................................... 51,330
Net change in deferred foreign capital gains tax.................................................. 72,054
------------
Net change in unrealized appreciation (depreciation).............................................. (8,823,189)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................... (13,386,231)
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.................................. $ (9,934,480)
============
Page 18 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
12/31/2015 12/31/2014
------------- -------------
OPERATIONS:
Net investment income (loss)...................................................... $ 3,451,751 $ 4,098,406
Net realized gain (loss).......................................................... (4,563,042) (523,121)
Net change in unrealized appreciation (depreciation).............................. (8,823,189) (6,876,815)
------------- -------------
Net increase (decrease) in net assets resulting from operations................... (9,934,480) (3,301,530)
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................. -- (1,678,391)
Net realized gain................................................................. -- (2,365,537)
Return of capital................................................................. (7,445,649) (3,414,971)
------------- -------------
Total distributions to shareholders............................................... (7,445,649) (7,458,899)
------------- -------------
CAPITAL TRANSACTIONS:
Repurchase of Common Shares....................................................... (527,625) --
------------- -------------
Net increase (decrease) in net assets resulting from capital transactions......... (527,625) --
------------- -------------
Total increase (decrease) in net assets........................................... (17,907,754) (10,760,429)
NET ASSETS:
Beginning of period............................................................... 99,052,617 109,813,046
------------- -------------
End of period..................................................................... $ 81,144,863 $ 99,052,617
============= =============
Accumulated net investment income (loss) at end of period......................... $ (43,233) $ 42,897
============= =============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period.............................................. 5,327,785 5,327,785
Common Shares repurchased*........................................................ (38,446) --
------------- -------------
Common Shares at end of period.................................................... 5,289,339 5,327,785
============= =============
-----------------------------
* On September 15, 2015, the Fund commenced a Share Repurchase Program. The
program will continue until the earlier of (i) the repurchase of 266,389
common shares, or (ii) six months from implementation of the Fund's Share
Repurchase Program. Since September 15, 2015, the Fund repurchased 38,446
of its shares at a weighted-average discount of 15.14% from net asset
value per share. The Fund expects to repurchase its outstanding shares
until the earlier of (i) the repurchase of an additional 227,943 common
shares (for an aggregate of 266,389), or (ii) March 15, 2016.
See Notes to Financial Statements Page 19
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations................. $ (9,934,480)
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by operating activities:
Purchases of investments.................................................. (43,033,841)
Sales, maturities and paydowns of investments............................. 46,146,327
Net amortization/accretion of premiums/discounts on investments........... (200,527)
Net realized gain/loss on investments..................................... (274,534)
Net realized gain/loss on foreign currency transactions (a)............... 4,717,106
Net change in unrealized appreciation/depreciation on forward foreign
currency contracts..................................................... (92,697)
Net change in unrealized appreciation/depreciation on investments......... 9,039,270
CHANGES IN ASSETS AND LIABILITIES:
Decrease in interest receivable........................................... 241,184
Increase in dividends receivable.......................................... (30,004)
Increase in other assets.................................................. (2,132)
Decrease in interest and fees on loan payable............................. (5,203)
Decrease in investment advisory fees payable.............................. (15,409)
Increase in legal fees payable............................................ 508
Increase in transfer agent fees payable................................... 28
Decrease in printing fees payable......................................... (599)
Decrease in administrative fees payable................................... (26,112)
Decrease in custodian fees payable........................................ (18,232)
Increase in Trustees' fees and expenses payable........................... 47
Decrease in deferred foreign capital gain tax............................. (72,054)
Increase in other liabilities............................................. 1,892
-------------
CASH USED IN OPERATING ACTIVITIES............................................... $ 6,440,538
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of Common Shares............................................... (527,625)
Distributions to Common Shareholders from return of capital............... (7,445,649)
-------------
CASH USED IN FINANCING ACTIVITIES............................................... (7,973,274)
-------------
Decrease in cash and foreign currency (b)....................................... (1,532,736)
Cash and foreign currency at beginning of period................................ 1,991,307
-------------
CASH AND FOREIGN CURRENCY AT END OF PERIOD...................................... $ 458,571
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees............................... $ 72,475
=============
-----------------------------
(a) This amount is a component of net realized gain/(loss) on foreign currency
transactions as shown on the Statement of Operations.
(b) Includes net change in unrealized appreciation (depreciation) on foreign
currency of $51,330.
Page 20 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
2015 2014 2013 2012 2011
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period........ $ 18.59 $ 20.61 $ 23.67 $ 20.30 $ 22.77
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................ 0.65 0.77 0.79 0.90 0.98
Net realized and unrealized gain (loss)..... (2.52) (1.39) (2.45) 3.87 (2.05)
---------- ---------- ---------- ---------- ----------
Total from investment operations............ (1.87) (0.62) (1.66) 4.77 (1.07)
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income....................... -- (0.32) (0.76) (0.88) (0.74)
Net realized gain........................... -- (0.44) (0.64) (0.52) (0.66)
Return of capital........................... (1.40) (0.64) -- -- --
---------- ---------- ---------- ---------- ----------
Total from distributions.................... (1.40) (1.40) (1.40) (1.40) (1.40)
---------- ---------- ---------- ---------- ----------
Common share repurchases.................... 0.02 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of period.............. $ 15.34 $ 18.59 $ 20.61 $ 23.67 $ 20.30
========== ========== ========== ========== ==========
Market value, end of period................. $ 13.06 $ 16.45 $ 18.05 $ 22.05 $ 17.82
========== ========== ========== ========== ==========
TOTAL RETURN BASED ON NET ASSET VALUE (a)... (9.16)% (2.49)% (6.49)% 24.36% (4.18)%
========== ========== ========== ========== ==========
TOTAL RETURN BASED ON MARKET VALUE (a)...... (12.61)% (1.47)% (12.13)% 32.02% (10.17)%
========== ========== ========== ========== ==========
-----------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........ $ 81,145 $ 99,053 $ 109,813 $ 126,093 $ 108,174
Ratio of expenses to average net assets..... 1.69% 1.71% 1.75% 1.78% 1.68%
Ratio of total expenses to average net
assets excluding interest expense........ 1.62% 1.64% 1.68% 1.70% 1.61%
Ratio of net investment income (loss) to
average net assets....................... 3.66% 3.73% 3.57% 4.04% 4.47%
Portfolio turnover rate..................... 44% 48% 50% 49% 51%
INDEBTEDNESS:
Total loan outstanding (in 000's)........... $ 5,800 $ 5,800 $ 5,800 $ 5,800 $ 5,800
Asset coverage per $1,000 senior
indebtedness (b)......................... $ 14,990 $ 18,078 $ 19,933 $ 22,740 $ 19,651
-----------------------
(a) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in net asset value per share
for net asset value returns and changes in Common Share price for market
value returns. Total returns do not reflect sales load and are not
annualized for periods of less than one year. Past performance is not
indicative of future results.
(b) Calculated by subtracting the Fund's total liabilities (not including the
loan outstanding) from the Fund's total assets, and dividing by the
outstanding loan balance in 000's.
See Notes to Financial Statements Page 21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2015
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 Fund, which is an investment company within the scope of Financial
Accounting Standards Board ("FASB") Accounting Standards Update 2013-08, follows
accounting and reporting guidance under FASB Accounting Standards Codification
Topic 946, "Financial Services-Investment Companies." The following is a summary
of significant accounting policies consistently followed by the Fund in the
preparation of its financial statements. The preparation of financial statements
in accordance with accounting principles generally accepted in the United States
of America ("U.S. GAAP") requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The net asset value ("NAV") of the Common Shares of the Fund is determined
daily, as of the close of regular trading on the NYSE, normally 4:00 p.m.
Eastern time, on each day the NYSE is open for trading. If the NYSE closes early
on a valuation day, the NAV is determined as of that time. Domestic debt
securities and foreign securities are priced using data reflecting the earlier
closing of the principal markets for those securities. The Fund's NAV per Common
Share is calculated by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses, dividends declared but unpaid and any borrowings of the Fund), by the
total number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Fund's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Fund's Board of Trustees,
and in accordance with provisions of the 1940 Act. Investments valued by the
Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to
the Portfolio of Investments. The Fund's investments are valued as follows:
Corporate bonds, corporate notes and other debt securities are valued on
the basis of valuations provided by dealers who make markets in such
securities or by an independent pricing service approved by the Fund's
Board of Trustees, which may use the following valuation inputs when
available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Fixed income and other debt securities having a remaining maturity of
sixty days or less when purchased are fair valued at cost adjusted for
amortization of premiums and accretion of discounts (amortized cost),
provided the Advisor's Pricing Committee has determined that the use of
amortized cost is an appropriate reflection of fair value given market and
issuer specific conditions existing at the time of the determination.
Factors that may be considered in determining the appropriateness of the
use of amortized cost include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes
thereto;
2) the liquidity conditions in the relevant market and changes
thereto;
3) the interest rate conditions in the relevant market and
changes thereto (such as significant changes in interest
rates);
Page 22
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2015
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing
Committee may use last-obtained market-based data to assist it
when valuing portfolio securities using amortized cost.
Common stocks and other securities listed on any national or foreign
exchange (excluding The Nasdaq(R) Stock Market, LLC ("Nasdaq") and the
London Stock Exchange Alternative Investment Market ("AIM")) are valued at
the last sale price on the exchange on which they are principally traded
or, for Nasdaq and AIM securities, the official closing price. Securities
traded on more than one securities exchange are valued at the last sale
price or official closing price, as applicable, at the close of the
securities exchange representing the principal market for such securities.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked prices, if available, and
otherwise at their closing bid price.
Forward foreign currency contracts are valued at the current day's
interpolated foreign exchange rate, as calculated using the current day's
spot rate, and the thirty, sixty, ninety and one-hundred eighty day
forward rates provided by an independent pricing service.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose
market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's fair value. As a general
principle, the current fair value of a security would appear to be the amount
which the owner might reasonably expect to receive for the security upon its
current sale. When fair value prices are used, generally they will differ from
market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the fundamental business data relating to the issuer, or
economic data relating to the country of issue;
2) an evaluation of the forces which influence the market in
which these securities are purchased and sold; 3) the type,
size and cost of security;
4) the financial statements of the issuer, or the financial
condition of the country of issue;
5) the credit quality and cash flow of the issuer, or country of
issue, based on the Sub-Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities
(or equity securities) of the issuer/borrower, or comparable
companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any,
securing the security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the issuer's management (for corporate debt
only);
11) the economic, political and social prospects/developments of
the country of issue and the assessment of the country's
governmental leaders/officials (for sovereign debt only);
12) the prospects for the issuer's industry, and multiples (of
earnings and/or cash flows) being paid for similar businesses
in that industry (for corporate debt only); and
13) other relevant factors.
Fair valuation of an equity security will be based on the consideration of all
available information, including, but not limited to the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or
the appropriate stock exchange;
Page 23
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2015
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might
affect the value of the security.
If the equity security in question is a foreign security, the following
additional information may be considered:
1) the value of similar foreign securities traded on other
foreign markets;
2) ADR trading of similar securities;
3) closed-end fund trading of similar securities;
4) foreign currency exchange activity;
5) the trading prices of financial products that are tied to
baskets of foreign securities;
6) factors relating to the event that precipitated the pricing
problem;
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.
Because foreign markets may be open on different days than the days during which
investors may transact in the shares of the Fund, the value of the Fund's
securities may change on the days when investors are not able to transact in the
shares of the Fund. The value of securities denominated in foreign currencies is
converted into U.S. dollars using exchange rates determined daily as of the
close of regular trading on the NYSE.
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 methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of December 31, 2015, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
daily on the accrual basis. Amortization of premiums and accretion of discounts
are recorded by using the effective interest method.
Securities purchased on a when-issued, delayed-delivery or forward commitment
basis may have extended settlement periods. The value of the security so
purchased is subject to market fluctuations during this period. The Fund
maintains liquid assets with a current value at least equal to the amount of its
when-issued, delayed-delivery or forward purchase commitments until payment is
made. At December 31, 2015, the Fund had no when-issued, delayed-delivery or
forward purchase commitments.
C. FORWARD FOREIGN CURRENCY CONTRACTS
The Fund is subject to foreign currency risk in the normal course of pursuing
its investment objective. Forward foreign currency contracts are agreements
between two parties ("Counterparties") to exchange one currency for another at a
future date and at a specified price. The Fund uses forward foreign currency
contracts to facilitate transactions in foreign securities and to manage the
Fund's foreign currency exposure. These contracts are valued daily, and the
Fund's net equity therein, representing unrealized gain or loss on the contracts
as measured by the difference between the forward foreign exchange rates at the
dates of entry into the contracts and the forward rates at the reporting date,
is included in "Unrealized appreciation/(depreciation) on forward foreign
Page 24
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2015
currency contracts" on the Statement of Assets and Liabilities. The change in
unrealized appreciation/(depreciation) is included in "Net change in unrealized
appreciation (depreciation) on forward foreign currency contracts" on the
Statement of Operations. When the forward contract is closed, the Fund records a
realized gain or loss equal to the difference between the proceeds from (or the
cost of) the closing transaction and the Fund's basis in the contract. This
realized gain or loss is included in "Net realized gain (loss) on forward
foreign currency contracts" on the Statement of Operations. Risks arise from the
possible inability of counterparties to meet the terms of their contracts and
from movement in currency and securities values and interest rates. Due to the
risks, the Fund could incur losses in excess of the net unrealized value shown
on the Forward Foreign Currency Contracts table in the Portfolio of Investments.
In the event of default by the Counterparty, the Fund will provide notice to the
Counterparty of the Fund's intent to convert the currency held by the Fund into
the currency that the Counterparty agreed to exchange with the Fund. If a
Counterparty becomes bankrupt or otherwise fails to perform its obligations due
to financial difficulties, the Fund may experience significant delays in
obtaining any recovery in a bankruptcy or other reorganization proceeding. The
Fund may obtain only limited recovery or may obtain no recovery in such
circumstances.
D. OFFSETTING ON THE STATEMENT OF ASSETS AND LIABILITIES
Offsetting Assets and Liabilities requires entities to disclose both gross and
net information about instruments and transactions eligible for offset on the
Statement of Assets and Liabilities, and disclose instruments and transactions
subject to master netting or similar agreements. These disclosure requirements
are intended to help investors and other financial statement users better assess
the effect or potential effect of offsetting arrangements on a fund's financial
position. The transactions subject to offsetting disclosures are derivative
instruments, repurchase agreements and reverse repurchase agreements, and
securities borrowing and securities lending transactions.
For financial reporting purposes, the Fund does not offset financial assets and
financial liabilities that are subject to master netting arrangements ("MNAs")
or similar agreements on the Statement of Assets and Liabilities. MNAs provide
the right, in the event of default (including bankruptcy and insolvency) for the
non-defaulting Counterparty to liquidate the collateral and calculate the net
exposure to the defaulting party or request additional collateral.
At December 31, 2015, derivative assets and liabilities (by type) on a gross
basis are as follows:
Gross Amounts
not Offset in the
Statement of
Net Amounts of Assets and Liabilities
Gross Amounts Assets Presented -----------------------
Gross amounts of Offset in the in the Statement Collateral
Recognized Statement of Assets of Assets and Financial Amounts
Assets and Liabilities Liabilities Instruments Received Net Amount
---------------------------------------------------------------------------------------------------------------------
Forward Foreign
Currency Contracts* $ 34,768 $ -- $ 34,768 $ -- $ -- $ 34,768
* The respective counterparties for each contract are disclosed in the
Forward Foreign Currency Contracts table in the Portfolio of Investments.
E. FOREIGN CURRENCY
The books and records of the Fund are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investments and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statement of Operations. Unrealized gains and losses on
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statement of Operations. Net realized foreign currency gains and losses
include the effect of changes in exchange rates between trade date and
settlement date on investment security transactions, foreign currency
transactions and interest and dividends received and are shown in "Net realized
gain (loss) on foreign currency transactions" on the Statement of Operations.
The portion of foreign currency gains and losses related to fluctuation in
exchange rates between the initial purchase settlement date and subsequent sale
trade date is included in "Net realized gain (loss) on foreign currency
transactions" on the Statement of Operations.
Page 25
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2015
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
federal 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 Common
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. Permanent differences
incurred during the year ended December 31, 2015, primarily as a result of
differing book and tax treatment on realization of foreign currency gains
(losses), have been reclassified at year end to reflect a decrease to
accumulated net investment income (loss) of $3,537,881, an increase to
accumulated net realized gain (loss) of $4,750,402 and a decrease to
paid-in-capital of $1,212,521. Net assets were not affected by these
reclassifications.
The tax character of distributions paid during the fiscal years ended December
31, 2015, and December 31, 2014 was as follows:
Distributions paid from: 2015 2014
Ordinary income................................. $ -- $ 1,761,380
Capital gain.................................... -- 2,282,548
Return of capital............................... 7,445,649 3,414,971
As of December 31, 2015, the distributable earnings and net assets on a tax
basis were as follows:
Accumulated capital and other losses............ (29,495)
Net unrealized appreciation (depreciation)...... (3,635,946)
-------------
Total accumulated earnings (losses)............. (3,665,441)
Other........................................... (25,406)
Paid-in capital................................. 84,835,710
-------------
Net assets...................................... $ 81,144,863
=============
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 "Foreign capital gains tax" on the Statement of Operations.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At December 31, 2015, the
Fund had no non-expiring capital loss carryforwards for federal income tax
purposes.
Certain losses realized during the current fiscal year may be deferred and
treated as occurring on the first day of the following fiscal year for federal
income tax purposes. For the fiscal year ended December 31, 2015, the Fund
incurred and elected to defer capital losses of $29,495.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ended 2012, 2013,
2014, and 2015 remain open to federal and state audit. As of December 31, 2015,
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.
Page 26
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2015
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. BNYM IS and BNYM are subsidiaries of The Bank of New York Mellon
Corporation, a financial holding company.
At a meeting on December 7, 2015, the Board accepted Mr. Bradley's resignation
from his position as the President and Chief Executive Officer of the Fund,
effective December 31, 2015. At the same meeting, the Board elected Mr. Dykas,
formerly Chief Financial Officer and Treasurer of the Fund, to serve as the
President and Chief Executive Officer and Mr. Swade, formerly an Assistant
Treasurer of the Fund, to serve as the Treasurer, Chief Financial Officer and
Chief Accounting Officer of the Fund.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated pro rata among each fund in the First Trust Fund
Complex based on net assets. Each Independent Trustee is also paid an annual per
fund fee that varies based on whether the fund is a closed-end or other actively
managed fund, or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Trustees are reimbursed for travel and out-of-pocket expenses in connection with
all meetings. The Lead Independent Trustee and Committee Chairmen rotate every
three years. The officers and "Interested" Trustee receive no compensation from
the Trust for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investments, excluding short-term
investments, for the year ended December 31, 2015, were $42,791,093 and
$46,221,012, respectively.
5. DERIVATIVES TRANSACTIONS
The following table presents the type of derivative held by the Fund at December
31, 2015, the primary underlying risk exposure and location of these instruments
as presented on the Statement of Assets and Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES
--------------------------------------- ----------------------------------------
DERIVATIVE STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND
INSTRUMENT RISK EXPOSURE LIABILITIES LOCATION VALUE LIABILITIES LOCATION VALUE
------------------ --------------- ----------------------- -------------- ----------------------- ---------------
Unrealized appreciation Unrealized depreciation
Forward foreign on forward foreign on forward foreign
currency contracts Currency Risk currency contracts $ 34,768 currency contracts $ --
Page 27
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2015
The following table presents the amount of net realized gain(loss) and change in
net unrealized appreciation (depreciation) recognized for the year ended
December 31, 2015, on derivative instruments, as well as the primary underlying
risk exposure associated with each instrument.
STATEMENT OF OPERATIONS LOCATION
--------------------------------------------------------------------------------
CURRENCY RISK EXPOSURE
Net realized gain (loss) on forward foreign currency contracts $ 203,374
Net change in unrealized appreciation (depreciation) on forward
foreign currency contracts $ 92,697
During the year ended December 31, 2015, notional values of forward foreign
currency contracts opened and closed were $42,710,184 and $60,872,649,
respectively.
6. BORROWINGS
The Fund has entered into a credit agreement with The Bank of Nova Scotia, which
provides for a revolving credit facility to be used as leverage for the Fund.
The revolving credit facility provides for a secured line of credit for the Fund
where Fund assets are pledged against advances made to the Fund. Under the
requirements of the 1940 Act, the Fund, immediately after any such borrowings,
must have an "asset coverage" of at least 300% (33-1/3% of the Fund's total
assets after borrowings). Effective November 6, 2015, the credit facility was
amended, whereby the expiration date was extended until November 4, 2016, and
the total commitment was reduced from $15,000,000 to $10,000,000. The borrowing
rate under the revolving credit facility is equal to the 1-month LIBOR plus 75
basis points. As of December 31, 2015, the Fund had one loan outstanding under
the revolving credit facility totaling $5,800,000. For the year ended December
31, 2015, the average amount outstanding was $5,800,000. The high and low annual
interest rates during the year ended December 31, 2015 were 1.07% and 0.92%,
respectively, and the weighted average interest rate was 0.95%. The interest
rate at December 31, 2015 was 1.07%. The Fund pays a commitment fee of 0.15% (or
0.25% if loan balance drops below 75% of total commitment) per year, which is
included in "Interest and fees on loan" on the Statement of Operations. Prior to
November 6, 2015, the Fund paid a commitment fee of 0.15% (or 0.30% if the loan
balance dropped below 40% of the total commitment) per year.
7. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
8. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Funds
through the date the financial statements were issued, and has determined that
there was the following subsequent event:
Effective January 1, 2016, the fixed annual retainer paid to the Independent
Trustees will be allocated equally among each fund in the First Trust Fund
Complex and will no longer be allocated pro rata based on each Fund's net
assets.
Page 28
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST/ABERDEEN EMERGING
OPPORTUNITY FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust/Aberdeen Emerging Opportunity Fund (the "Fund"), including the portfolio
of investments, as of December 31, 2015, and the related statements of
operations and cash flows for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of December 31, 2015 by correspondence with the Fund's
custodian and brokers; when replies were not received from brokers, we performed
other auditing procedures. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Trust/Aberdeen Emerging Opportunity Fund, as of December 31, 2015, and the
results of its operations and its cash flows for the year then ended, the
changes in its net assets for each of the two years in the period then ended,
and the financial highlights for each of the five years in the period then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 23, 2016
Page 29
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2015 (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 December 31
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 30
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2015 (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 Form N-Q's
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
TAX INFORMATION
The Fund hereby designates as qualified dividend income 100% of its ordinary
income distributions (including short-term capital gains, if applicable) for the
year ended December 31, 2015. None of the ordinary income (including short-term
capital gain, if applicable) distributions made by the Fund during the year
ended December 31, 2015, qualify for corporate dividends received deduction
available to corporate shareholders.
The Fund meets the requirements of Section 853 of the Code, and elects to pass
through to its shareholders credit for foreign taxes paid. The total amount of
income received by the Fund from sources within foreign countries and
possessions of the United States is $4,287,179 (representing a total of $0.81
per share). The total amount of taxes paid to such countries is $144,627
(representing a total of $0.03 per share).
NYSE CERTIFICATION INFORMATION
In accordance with Section 303A-12 of the New York Stock Exchange ("NYSE")
Listed Company Manual, the Fund's President has certified to the NYSE that, as
of April 29, 2015, he was not aware of any violation by the Fund of NYSE
corporate governance listing standards. In addition, the Fund's reports to the
SEC on Forms N-CSR, N-CSRS and N-Q contain certifications by the Fund's
principal executive officer and principal financial officer that relate to the
Fund's public disclosure in such reports and are required by Rule 30a-2 under
the 1940 Act.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy
Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust Dividend and Income Fund, First Trust High Income Long/Short
Fund, First Trust Energy Infrastructure Fund, First Trust MLP and Energy Income
Fund and First Trust Intermediate Duration Preferred & Income Fund was held on
April 20, 2015 (the "Annual Meeting"). At the Annual Meeting, Richard E.
Erickson and Thomas R. Kadlec were elected by the Common Shareholders of the
First Trust/Aberdeen Emerging Opportunity Fund as Class II Trustees for a
three-year term expiring at the Fund's Annual Meeting of Shareholders in 2018.
The number of votes cast for Mr. Erickson was 3,646,897, the number of votes
against was 812,053 and the number of broker non-votes was 868,835. The number
of votes cast for Mr. Kadlec was 3,646,657, the number of votes against was
812,293 and the number of broker non-votes was 868,835. James A. Bowen, Robert
F. Keith and Niel B. Nielson are the other current and continuing Trustees.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some, but not all,
of the risks that should be considered for the Fund. For additional information
about the risks associated with investing in the Fund, please see the Fund's
prospectus and statement of additional information, as well as other Fund
regulatory filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund, which include a global bond and equity
portfolio of investment grade and below-investment grade government and
corporate debt securities. The value of these securities, like other market
investments, may move up or down, sometimes rapidly and unpredictably. Common
Shares at any point in time may be worth less than the original investment, even
after taking into account the reinvestment of Fund dividends and distributions.
Security prices can fluctuate for several reasons including the general
condition of the bond market, or when political or economic events affecting the
issuers occur. When the Advisor or Sub-Advisor determines that it is temporarily
unable to follow the Fund's investment strategy or that it is impractical to do
so (such as when a market disruption event has occurred and trading in the
securities is extremely limited or absent), the Fund may take temporary
defensive positions.
Page 31
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2015 (UNAUDITED)
NON-INVESTMENT GRADE SECURITIES RISK: The Fund may invest up to 80% of its
Managed Assets in non-investment grade securities. Non-investment grade
securities are rated below "Baa3" by Moody's Investors Service, Inc., below
"BBB-" by Standard & Poor's, or comparably rated by another nationally
recognized statistical rating organization or, if unrated, determined by the
Sub-Advisor to be of comparable credit quality. Non-investment grade debt
instruments are commonly referred to as "high-yield" or "junk" bonds and are
considered speculative with respect to the issuer's capacity to pay interest and
repay principal and are susceptible to default or decline in market value due to
adverse economic and business developments. The market values for high-yield
securities tend to be very volatile, and these securities are less liquid than
investment grade debt securities.
EMERGING MARKETS RISK: Under normal market conditions, the Fund will invest at
least 80% of its Managed Assets in equity or fixed-income securities of issuers
located in countries considered to be emerging markets. Investments in such
securities are considered speculative. In addition to the general risks of
investing in non-U.S. securities, heightened risks of investing in emerging
markets securities include: smaller market capitalization of securities markets,
which may suffer periods of relative illiquidity; significant price volatility;
restrictions on foreign investment; and possible restrictions on repatriation of
investment income and capital. Furthermore, foreign investors may be required to
register the proceeds of sales, and future economic or political crises could
lead to price controls, forced mergers, expropriation or confiscatory taxation,
seizure, nationalization or creation of government monopolies. The currencies of
emerging market countries may experience significant declines against the U.S.
dollar, and devaluation may occur subsequent to investments in these currencies
by the Fund. Inflation and rapid fluctuations in inflation rates have had, and
may continue to have, negative effects on the economies and securities markets
of certain emerging market countries.
FIXED-INCOME SECURITIES RISK: Debt securities, including high-yield securities,
are subject to certain risks, including: (i) issuer risk, which is the risk that
the value of fixed-income securities may decline for a number of reasons which
directly relate to the issuer, such as management performance, financial
leverage and reduced demand for the issuer's goods and services or; (ii)
reinvestment risk, which is the risk that income from the Fund's portfolio will
decline if the Fund invests the proceeds from matured, traded or called bonds at
market interest rates that are below the Fund portfolio's current earnings rate;
(iii) prepayment risk, which is the risk that during periods of declining
interest rates, the issuer of a security may exercise its option to prepay
principal earlier than scheduled, forcing the reinvestment in lower yielding
securities; and (iv) credit risk, which is the risk that a security in the
Fund's portfolio will decline in price or the issuer fails to make interest
payments when due because the issuer of the security experiences a decline in
its financial status.
INTEREST RATE RISK: The Fund's portfolio is also subject to interest rate risk.
Interest rate risk is the risk that fixed-income securities will decline in
value because of changes in market interest rates. Investments in debt
securities with long-term maturities may experience significant price declines
if long-term interest rates increase.
NON-U.S. ISSUER RISK: Investments in the securities and instruments of non-U.S.
issuers involve certain considerations and risks not ordinarily associated with
investments in securities and instruments of U.S. issuers. Non-U.S. companies
are not generally subject to uniform accounting, auditing and financial
standards and requirements comparable to those applicable to U.S. companies.
Non-U.S. securities exchanges, brokers and listed companies may be subject to
less government supervision and regulation than exists in the United States.
Dividend and interest income may be subject to withholding and other non-U.S.
taxes, which may adversely affect the net return on such investments. There may
be difficulty in obtaining or enforcing a court judgment abroad.
CURRENCY RISK: The value of securities denominated or quoted in foreign
currencies may be adversely affected by fluctuations in the relative currency
exchange rates and by exchange control regulations. The Fund's investment
performance may be negatively affected by a devaluation of a currency in which
the Fund's investments are denominated or quoted. Further, the Fund's investment
performance may be significantly affected, either positively or negatively, by
currency exchange rates because the U.S. dollar value of securities denominated
or quoted in another currency will increase or decrease in response to changes
in the value of such currency in relation to the U.S. dollar. While certain of
the Fund's non-U.S. dollar-denominated securities may be hedged into U.S.
dollars, hedging may not alleviate all currency risks.
LEVERAGE RISK: The use of leverage results in additional risks and can magnify
the effect of any losses. The funds borrowed pursuant to a leverage borrowing
program constitute a substantial lien and burden by reason of their prior claim
against the income of the Fund and against the net assets of the Fund in
liquidation. The rights of lenders to receive payments of interest on and
repayments of principal on any borrowings made by the Fund under a leverage
borrowing program are senior to the rights of holders of Common Shares with
respect to payment of dividends or upon liquidation. If the Fund is not in
compliance with certain credit facility provisions, the Fund may not be
permitted to declare dividends or other distributions, including dividends and
distributions with respect to Common Shares or purchase Common Shares.
GOVERNMENT SECURITIES RISK: The ability of a government issuer, especially in an
emerging market country, to make timely and complete payments on its debt
obligations will be strongly influenced by the government issuer's balance of
payments, including export performance, its access to international credits and
investments, fluctuations of interest rates and the extent of its foreign
reserves. A country whose exports are concentrated in a few commodities or whose
economy depends on certain strategic imports could be vulnerable to fluctuations
in international prices of these commodities or imports. To the extent that a
Page 32
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2015 (UNAUDITED)
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 33
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2015 (UNAUDITED)
The Fund's statement of additional information includes additional information
about the Trustees and is available, without charge, upon request, by calling
(800) 988-5891.
NUMBER OF OTHER
PORTFOLIOS IN TRUSTEESHIPS OR
THE FIRST TRUST DIRECTORSHIPS
NAME, ADDRESS, TERM OF OFFICE FUND COMPLEX HELD BY TRUSTEE
DATE OF BIRTH AND AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE FUND SERVICE(2) DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Three-Year Term Physician; President, Wheaton Orthopedics; 120 None
c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate
120 East Liberty Drive, o Since Fund Limited Partnership; Member, Sportsmed
Suite 400 Inception LLC
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Three-Year Term President, ADM Investor Services, Inc. 120 Director of ADM
c/o First Trust Advisors L.P. (Futures Commission Merchant) Investor Services,
120 East Liberty Drive, o Since Fund Inc., ADM
Suite 400 Inception Investor Services
Wheaton, IL 60187 International, and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Three-Year Term President, Hibs Enterprises (Financial and 120 Director of Trust
c/o First Trust Advisors L.P. Management Consulting) Company of
120 East Liberty Drive, o Since Fund Illinois
Suite 400 Inception
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Three-Year Term Managing Director and Chief Operating 120 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant
120 East Liberty Drive, o Since Fund Harapan Education Foundation (Educational Transport, Inc.
Suite 400 Inception Products and Services); President and Chief (May 2003 to
Wheaton, IL 60187 Executive Officer (June 2012 to September May 2014)
D.O.B.: 03/54 2014), Servant Interactive LLC (Educational
Products and Services); President and Chief
Executive Officer (June 2012 to September
2014), Dew Learning LLC (Educational
Products and Services); President
(June 2002 to June 2012), Covenant College
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee o Three-Year Term Chief Executive Officer, First Trust 120 None
and Chairman of the Board Advisors L.P. and First Trust Portfolios
120 East Liberty Drive, o Since Fund L.P.; Chairman of the Board of Directors,
Suite 400 Inception BondWave LLC (Software Development
Wheaton, IL 60187 Company/Investment Advisor) and
D.O.B.: 09/55 Stonebridge Advisors LLC (Investment
Advisor)
-----------------------------
(1) Mr. Bowen is deemed an "interested person" of the Fund due to his position
as Chief Executive Officer of First Trust Advisors L.P., investment
advisor of the Fund.
(2) Currently, Richard E. Erickson and Thomas R. Kadlec, as Class II Trustees,
are serving as trustees until the Fund's 2018 annual meeting of
shareholders. James A. Bowen and Niel B. Nielson, as Class III Trustees,
are serving as trustees until the Fund's 2016 annual meeting of
shareholders. Robert F. Keith, as a Class I Trustee, is serving as a
trustee until the Fund's 2017 annual meeting of shareholders.
Page 34
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2015 (UNAUDITED)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(3)
------------------------------------------------------------------------------------------------------------------------------------
James M. Dykas President and Chief o Indefinite Term Managing Director and Chief Financial Officer
120 E. Liberty Drive, Executive Officer (January 2016 to Present), Controller (January 2011
Suite 400 o Since January 2016 to January 2016), Senior Vice President (April 2007
Wheaton, IL 60187 to January 2016), First Trust Advisors L.P. and
D.O.B.: 01/66 First Trust Portfolios L.P.
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P. and
120 E. Liberty Drive, Legal Officer First Trust Portfolios L.P.; Secretary and
Suite 400 o Since Fund Inception General Counsel, BondWave LLC (Software
Wheaton, IL 60187 Development Company/Investment Advisor);
D.O.B.: 05/60 Secretary of Stonebridge Advisors LLC
(Investment Advisor)
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present),
120 E. Liberty Drive, Senior Vice President (September 2005 to July
Suite 400 o Since Fund Inception 2012), First Trust Advisors L.P. and First Trust
Wheaton, IL 60187 Portfolios L.P.
D.O.B: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite term Deputy General Counsel, First Trust Advisors L.P.
120 E. Liberty Drive, and Assistant Secretary and First Trust Portfolios L.P.
Suite 400 o Chief Compliance
Wheaton, IL 60187 Officer Since
D.O.B.: 12/66 January 2011
o Assistant Secretary
Since Fund Inception
Donald P. Swade Treasurer, Chief Financial o Indefinite Term Vice President (April 2012 to Present), First Trust
120 E. Liberty Drive, Officer and Chief Advisors L.P. and First Trust Portfolios L.P., Vice
Suite 400 Accounting Officer o Since January 2016 President (September 2006 to April 2012),
Wheaton, IL 60187 Guggenheim Funds Investment Advisors, LLC/
D.O.B.: 08/72 Claymore Securities, Inc.
-----------------------------
(3) Officers of the Fund have an indefinite term. The term "officer" means the
president, vice president, secretary, treasurer, controller or any other
officer who performs a policy making function.
Page 35
--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2015 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and considers your privacy an
important priority in maintaining that relationship. We are committed to
protecting the security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies".
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information with affiliates of the Fund.
PRIVACY ONLINE
We allow third-party companies, including AddThis (a social media sharing
service), to collect certain anonymous information when you visit our website.
These companies may use non-personally identifiable information during your
visits to this and other websites in order to provide advertisements about goods
and services likely to be of greater interest to you. These companies typically
use a cookie, third party web beacon or pixel tags, to collect this information.
To learn more about this behavioral advertising practice, you can visit
www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, First Trust restricts access to
your nonpublic personal information to those First Trust employees who need to
know that information to provide products or services to you. We maintain
physical, electronic and procedural safeguards to protect your nonpublic
personal information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
Page 36
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Aberdeen Asset Management Inc.
1735 Market Street, 32nd Floor
Philadelphia, PA 19103
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report, has
adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions, regardless
of whether these individuals are employed by the registrant or a third
party.
(c) There have been no amendments, during the period covered by this report,
to a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or
a third party, and that relates to any element of the code of ethics
description.
(d) The registrant has not granted any waivers, including an implicit waiver,
from a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or
a third party, that relates to one or more of the items set forth in
paragraph (b) of this item's instructions.
(e) Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the registrant's board of
trustees has determined that Thomas R. Kadlec and Robert F. Keith are qualified
to serve as audit committee financial experts serving on its audit committee and
that each of them is "independent," as defined by Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees (Registrant) -- The aggregate fees billed for each of the
last two fiscal years for professional services rendered by the principal
accountant for the audit of the registrant's annual financial statements or
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements were $53,000 for 2014 and
$53,000 for 2015.
(b) Audit-Related Fees (Registrant) -- The aggregate fees billed in each
of the last two fiscal years, for assurance and related services by the
principal accountant that are reasonably related to the performance of the audit
of the registrant's financial statements and are not reported under paragraph
(a) of this Item were $0 for 2014 and $0 for 2015.
Audit-Related Fees (Investment Adviser) -- The aggregate fees billed in
each of the last two fiscal years of the registrant for assurance and related
services by the principal accountant that are reasonably related to the
performance of the audit of the registrant's financial statements and are not
reported under paragraph (a) of this Item were $0 for 2014 and $0 for 2015.
(c) Tax Fees (Registrant) -- The aggregate fees billed in each of the last
two fiscal years for professional services rendered by the principal accountant
for tax compliance, tax advice, and tax planning to the registrant were $8,670
for 2014 and $9,080 for 2015. These fees were for tax preparation.
Tax Fees (Investment Adviser) -- The aggregate fees billed in each of the
last two fiscal years of the registrant for professional services rendered by
the principal accountant for tax compliance, tax advice, and tax planning to the
registrant's adviser were $0 for 2013 and $0 for 2014.
(d) All Other Fees (Registrant) -- The aggregate fees billed in each of
the last two fiscal years for products and services provided by the principal
accountant to the registrant, other than the services reported in paragraphs (a)
through (c) of this Item were $0 for 2014 and $3,000 for 2015. These fees were
for fund accounting system conversion.
All Other Fees (Investment Adviser) -- The aggregate fees billed in each
of the last two fiscal years for products and services provided by the principal
accountant to the registrant's investment adviser, other than services reported
in paragraphs (a) through (c) of this Item were $0 for 2014 and $0 for 2015.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
Pursuant to its charter and its Audit and Non-Audit Services Pre-Approval
Policy, the Audit Committee (the "Committee") is responsible for the
pre-approval of all audit services and permitted non-audit services (including
the fees and terms thereof) to be performed for the registrant by its
independent auditors. The Chairman of the Committee is authorized to give such
pre-approvals on behalf of the Committee up to $25,000 and report any such
pre-approval to the full Committee.
The Committee is also responsible for the pre-approval of the independent
auditor's engagements for non-audit services with the registrant's adviser (not
including a sub-adviser whose role is primarily portfolio management and is
sub-contracted or overseen by another investment adviser) and any entity
controlling, controlled by or under common control with the investment adviser
that provides ongoing services to the registrant, if the engagement relates
directly to the operations and financial reporting of the registrant, subject to
the de minimis exceptions for non-audit services described in Rule 2-01 of
Regulation S-X. If the independent auditor has provided non-audit services to
the registrant's adviser (other than any sub-adviser whose role is primarily
portfolio management and is sub-contracted with or overseen by another
investment adviser) and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to its policies, the Committee
will consider whether the provision of such non-audit services is compatible
with the auditor's independence.
(e)(2) The percentage of services described in each of paragraphs (b)
through (d) for the registrant and the registrant's investment adviser of this
Item that were approved by the audit committee pursuant to the pre-approval
exceptions included in paragraph (c)(7)(i)(c) or paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most recent
fiscal year that were attributed to work performed by persons other than the
principal accountant's full-time, permanent employees was less than fifty
percent.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's investment
adviser (not including any sub-adviser whose role is primarily portfolio
management and is subcontracted with or overseen by another investment adviser),
and any entity controlling, controlled by, or under common control with the
adviser that provides ongoing services to the Registrant for 2014 were $8,670
and $8,500 for the Registrant and the Registrant's investment adviser,
respectively and for 2015 were $12,080 and $12,500 for the Registrant and the
Registrant's investment adviser, respectively.
(h) The Registrant's audit committee of its Board of Trustees determined
that the provision of non-audit services that were rendered to the Registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another investment
adviser), and any entity controlling, controlled by, or under common control
with the investment adviser that provides ongoing services to the Registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The registrant has a separately designated audit committee consisting of
all the independent trustees of the Registrant. The members of the audit
committee are: Thomas R. Kadlec, Niel B. Nielson, Richard E. Erickson and
Robert F. Keith.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Proxy Voting Policies are attached herewith.
ABERDEEN U.S. REGISTERED ADVISERS (THE "ABERDEEN ADVISERS")
PROXY VOTING POLICIES AND PROCEDURES
Effective as of March 2, 2016
Policy Statement
Rule 206(4)-6 under the Investment Advisers Act of 1940, as amended (the
"Advisers Act") requires the Aberdeen Advisers to vote proxies in a manner
consistent with clients' best interest and must not place its interests above
those of its clients when doing so. It requires the Aberdeen Advisers to: (i)
adopt and implement written policies and procedures that are reasonably designed
to ensure that the Aberdeen Advisers vote proxies in the best interest of the
clients, and (ii) to disclose to the clients how they may obtain information on
how the Aberdeen Advisers voted proxies. In addition, Rule 204-2 requires the
Aberdeen Advisers to keep records of proxy voting and client requests for
information.
As registered investment advisers, the Aberdeen Advisers have an obligation to
vote proxies with respect to securities held in its client portfolios in the
best economic interests of the clients for which it has proxy voting authority.
The Aberdeen Advisers invest for the clients' portfolios in companies globally
and actively target investment in those companies with sound corporate
governance practices. The Aberdeen Advisers are committed to exercising
responsible ownership with a conviction that companies adopting best practices
in corporate governance will be more successful in their core activities and
deliver enhanced returns to shareholders.
Aberdeen's Corporate Governance Policy and Principles are published on our
website:
HTTP://WWW.ABERDEEN-
ASSET.COM/DOC.NSF/LIT/LEGALDOCUMENTATIONGROUPCORPORATEGOVERNANCEPRINCIPLES
Our proxy voting records are available per request, or on the SEC's website at
SEC.gov.
Policy
Each of the Aberdeen Advisers provides advisory resources to certain U.S.
clients, including substantive advice on voting proxies for certain equity
securities. These Policies and Procedures are adopted to ensure compliance by
the Aberdeen Advisers with Rule 206(4)-6 under the Advisers Act and other
applicable fiduciary obligations under rules and regulations of the SEC and
interpretations of its staff with respect to proxies for voting securities held
by client portfolios.
Clients may consist of investment companies registered under the Investment
Company Act of 1940, as amended ("1940 Act") (the "Funds" and each, a "Fund"),
and other U.S. residents as well as non-U.S. registered funds or clients. Each
Aberdeen Adviser follows these Policies and Procedures for each of its
respective U.S. clients as required under the Advisers Act and other applicable
law, unless expressly directed by a client in writing to refrain from voting
that client's proxies or to vote in accordance with the client's proxy voting
policies and procedures. The Aberdeen Advisers who advise or sub-advise the
Funds follow both these Policies and Procedures and the proxy voting policies
and procedures adopted by the Funds and their respective Boards of Directors or
Trustees. The Aberdeen Advisers located outside the U.S. may provide proxy
voting services to their non-U.S. based clients in accordance with the
regulatory requirements of the jurisdiction in which the client is located.
Aberdeen's Corporate Governance Policy and Principles are published on our
website:
HTTP://WWW.ABERDEEN-
ASSET.COM/DOC.NSF/LIT/LEGALDOCUMENTATIONGROUPCORPORATEGOVERNANCEPRINCIPLES
To the extent that an Aberdeen Adviser may rely on sub-advisers, whether
affiliated or unaffiliated, to manage any client portfolio on a discretionary
basis, the Aberdeen Adviser may delegate responsibility for voting proxies to
the sub-adviser. However, such sub-advisers will be required either to follow
these Policies and Procedures or to demonstrate that their proxy voting policies
and procedures are consistent with these Policies and Procedures or otherwise
implemented in the best interests of the Aberdeen Advisers' clients.
Upon request, the Aberdeen Advisers will provide clients with a copy of these
Policies and Procedures, as revised from time to time.
As disclosed in Part 2A of each Aberdeen Adviser's Form ADV, a client may obtain
information on how its proxies were voted by requesting such information from
its Aberdeen Adviser. Unless specifically requested by a client in writing, and
other than as required for the Funds, the Aberdeen Advisers do not generally
disclose client-specific proxy votes to third parties.
Our proxy voting records are available per request, or on the SEC's website at
SEC.gov.
ERISA
The U.S. Department of Labor ("DOL") has indicated that an investment adviser
with a duty to vote proxies has an obligation to take reasonable steps under the
circumstances to ensure that it receives the proxies. Failure to take any action
to reconcile proxies would cause Aberdeen to fail to satisfy ERISA's fiduciary
responsibility provisions. Appropriate steps include informing the Plan sponsor
and its trustees, bank custodian or broker/dealer custodian of the requirement
that all proxies be forwarded to the adviser and making periodic reviews during
the proxy season, including follow-up letters and phone calls if necessary. When
voting proxies, an investment manager must consider proxies as a Plan asset and
vote only in the best economic interests of the Plan participants, vote
consistently among clients, and avoid specific client voting instructions about
voting proxies.
DOL has provided investment managers with the following guidance about their
ERISA responsibilities, including proxy voting, compliance with written
statements of investment policy, and active monitoring of corporate management
by Plan fiduciaries:
i. Where the authority to manage Plan assets has been delegated to an
investment manager, only the investment manager has authority to vote
proxies, except when the named fiduciary has reserved to itself or to
another named fiduciary (as authorized by the plan document) the right to
direct a Plan trustee regarding the voting of proxies.
ii. Investment managers, as Plan fiduciaries, have a responsibility to vote
proxies on foreign issues that may affect the value of the shares in the
Plan's portfolio and will vote such proxies unless the cost of doing so
cannot be justified.
iii. An investment manager is required to comply with statements of investment
policy, unless compliance with the guidelines in a given instance would be
imprudent and therefore failure to follow the guidelines would not violate
ERISA. ERISA does not shield the investment manager from liability for
imprudent actions taken in compliance with a statement of investment
policy.
On occasions when it is deemed to be a fiduciary for an ERISA client's assets,
Aberdeen will vote the Plan assets in accordance with Aberdeen's Proxy Voting
Policy. Aberdeen will provide each ERISA client (upon request) with proxy voting
records to demonstrate how proxies for securities held in the portfolio were
voted.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(A)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
INFORMATION PROVIDED AS OF MARCH 8, 2016
Aberdeen Asset Management Inc. ("Aberdeen" or the "Sub-Advisor"), a Securities
and Exchange Commission registered investment advisor, is a wholly-owned
subsidiary of Aberdeen Asset Management PLC ("Aberdeen Group") and serves as the
investment sub-advisor to the registrant. Aberdeen Group is a publicly-traded
international investment management group listed on the London Stock Exchange,
managing assets for both institutional and retail clients from offices around
the world.
Investment decisions for the registrant are made by Aberdeen using a team
approach and not by any one individual. By making team decisions, Aberdeen seeks
to ensure that the investment process results in consistent returns across all
portfolios with similar objectives. Aberdeen does not employ separate research
analysts. Instead, Aberdeen's investment managers combine the roles of analysis
with portfolio management. Each member of the team has sector and portfolio
responsibilities such as day-to-day monitoring of liquidity. The overall result
of this matrix approach is a high degree of cross-coverage, leading to a deeper
understanding of the securities in which Aberdeen invests.
DEVAN KALOO
Head of Global Emerging Markets Equity
Mr. Kaloo is responsible for the London based Global Emerging Market ("GEM")
Equity Team, which manages Latin America, Europe, Middle East and Africa
equities, and also has oversight of global emerging market input from the Asia
research team based in Singapore, with which he works closely.
JOANNE IRVINE
Head of Global Emerging Markets ex Asia
Ms. Irvine is Head of Global Emerging Markets (ex-Asia), on the Global Emerging
Markets Equity Team in London. Joanne joined Aberdeen in 1996 in a group
development role, and moved to the Global Emerging Markets Equity Team in 1997.
PETER TAYLOR
Senior Investment Manager/Head of Corporate Governance, Global Emerging Markets
Equity
Mr. Taylor is a Senior Investment Manager and Head of Corporate Governance on
the Global Emerging Markets Equity Team. Peter joined Aberdeen's Asian Equities
Team in Singapore in 2007 and transferred to London in 2011. Previously, he was
with the International Finance Corporation, where he worked on corporate
governance and capital markets development for seven years from their Washington
DC and Hong Kong offices.
BRETT DIMENT
Head of Emerging Market Debt
Mr. Diment is Head of Emerging Market and Sovereign Debt and joined Aberdeen
following the acquisition of Deutsche Asset Management ("Deutsche") in 2005. He
is responsible for the day-to-day management of the Emerging Market Debt Team
and portfolios. Mr. Diment had been at Deutsche since 1991 as a member of the
Fixed Income group and served as Head of the Emerging Debt Team there from 1999
until its acquisition by Aberdeen.
MAX WOLMAN
Senior Investment Manager, Emerging Market Debt
Mr. Wolman is a Senior Investment Manager on the Emerging Market Debt Team and
has been with Aberdeen since January 2001. Mr. Wolman originally specialized in
currency and domestic debt analysis but is now responsible for a wide range of
emerging debt analysis including external and corporate issuers. Mr. Wolman is a
member of the Emerging Markets Debt Investment Committee at Aberdeen and is also
responsible for the daily implementation of the investment process.
(A)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBER
AND POTENTIAL CONFLICTS OF INTEREST
OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBER
INFORMATION PROVIDED AS OF DECEMBER 31, 2015
(assets in millions).
# of Accounts Total Assets
Managed for which for which
Total Advisory Fee is Advisory Fee
Name of Portfolio Manager or # of Accounts Total Based on is Based on
Team Member Type of Accounts Managed Assets Performance Performance
----------------
1. Devan Kaloo Registered Investment Companies: 10 $7,399.14 0 $0
Other Pooled Investment Vehicles: 25 $15,511.73 0 $0
Other Accounts: 62 $14,992.70 5 $1,146.25
2. Joanne Irvine Registered Investment Companies: 10 $7,399.14 0 $0
Other Pooled Investment Vehicles: 25 $15,511.73 0 $0
Other Accounts: 62 $14,992.70 5 $1,146.25
3. Peter Taylor Registered Investment Companies: 10 $7,399.14 0 $0
Other Pooled Investment Vehicles: 25 $15,511.73 0 $0
Other Accounts: 62 $14,992.70 5 $1,146.25
4. Brett Diment Registered Investment Companies: 5 $1,346.56 0 $0
Other Pooled Investment Vehicles: 95 $24,978.21 0 $0
Other Accounts: 184 $50,507.95 2 $308.77
5. Max Wolman Registered Investment Companies: 5 $1,346.56 0 $0
Other Pooled Investment Vehicles: 95 $24,978.21 0 $0
Other Accounts: 184 $50,507.95 2 $308.77
POTENTIAL CONFLICTS OF INTERESTS
AS OF DECEMBER 31, 2015
In accordance with legal requirements in the various jurisdictions in which they
operate, and their own Conflicts of Interest policies, all subsidiaries of
Aberdeen Asset Management PLC, (together Aberdeen), have in place arrangements
to identify and manage Conflicts of Interest that may arise between them and
their clients or between their different clients. Where Aberdeen does not
consider that these arrangements are sufficient to manage a particular conflict,
it will inform the relevant client(s) of the nature of the conflict so that the
client(s) may decide how to proceed.
The portfolio managers' management of "other accounts", including (1) mutual
funds; (2) other pooled investment vehicles; and (3) other accounts that may pay
advisory fees that are based on account performance ("performance-based fees"),
may give rise to potential conflicts of interest in connection with their
management of a fund's investments, on the one hand, and the investments of the
other accounts, on the other. The other accounts may have the same investment
objective as a Fund. Therefore, a potential conflict of interest may arise as a
result of the identical investment objectives, whereby the portfolio manager
could favor one account over another. However, Aberdeen believes that these
risks are mitigated by the fact that: (i) accounts with like investment
strategies managed by a particular portfolio manager are generally managed in a
similar fashion, subject to exceptions to account for particular investment
restrictions or policies applicable only to certain accounts, differences in
cash flows and account sizes, and similar factors; and (ii) portfolio manager
personal trading is monitored to avoid potential conflicts. In addition,
Aberdeen has adopted trade allocation procedures that require equitable
allocation of trade orders for a particular security among participating
accounts.
In some cases, another account managed by the same portfolio manager may
compensate Aberdeen based on the performance of the portfolio held by that
account. The existence of such performance-based fees may create additional
conflicts of interest for the portfolio manager in the allocation of management
time, resources and investment opportunities.
Another potential conflict could include instances in which securities
considered as investments for a Fund also may be appropriate for other
investment accounts managed by Aberdeen or its affiliates. Whenever decisions
are made to buy or sell securities by the Fund and one or more of the other
accounts simultaneously, Aberdeen may aggregate the purchases and sales of the
securities and will allocate the securities transactions in a manner that it
believes to be equitable under the circumstances. As a result of the
allocations, there may be instances where the fund will not participate in a
transaction that is allocated among other accounts. While these aggregation and
allocation policies could have a detrimental effect on the price or amount of
the securities available to a Fund from time to time, it is the opinion of
Aberdeen that the benefits from the Aberdeen organization outweigh any
disadvantage that may arise from exposure to simultaneous transactions. Aberdeen
has adopted policies that are designed to eliminate or minimize conflicts of
interest, although there is no guarantee that procedures adopted under such
policies will detect each and every situation in which a conflict arises.
(A)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
INFORMATION PROVIDED AS OF DECEMBER 31, 2015
Aberdeen Asset Management PLC's ("Aberdeen") remuneration policies are designed
to support its business strategy as a leading international asset manager. The
objective is to attract, retain and reward talented individuals for the delivery
of sustained, superior returns for Aberdeen's clients and shareholders. Aberdeen
operates in a highly competitive international employment market, and aims to
maintain its strong track record of success in developing and retaining talent.
Aberdeen's policy is to recognize corporate and individual achievements each
year through an appropriate annual bonus scheme. The aggregate value of awards
in any year is dependent on the group's overall performance and profitability.
Consideration is also given to the levels of bonuses paid in the market.
Individual awards, which are payable to all members of staff are determined by a
rigorous assessment of achievement against defined objectives.
A long-term incentive plan for key staff and senior employees comprises of a
mixture of cash and deferred shares in Aberdeen PLC or select Aberdeen funds
(where applicable). Overall compensation packages are designed to be competitive
relative to the investment management industry.
Base Salary
Aberdeen's policy is to pay a fair salary commensurate with the individual's
role, responsibilities and experience, and having regard to the market rates
being offered for similar roles in the asset management sector and other
comparable companies. Any increase is generally to reflect inflation and is
applied in a manner consistent with other Aberdeen employees; any other
increases must be justified by reference to promotion or changes in
responsibilities.
Annual Bonus
Aberdeen's policy is to recognize corporate and individual achievements each
year through an appropriate annual bonus scheme. The Remuneration Committee of
Aberdeen determines the key performance indicators that will be applied in
considering the overall size of the bonus pool. In line with practice amongst
other asset management companies, individual bonuses are not subject to an
absolute cap. However, the aggregate size of the bonus pool is dependent on the
group's overall performance and profitability. Consideration is also given to
the levels of bonuses paid in the market. Individual awards are determined by a
rigorous assessment of achievement against defined objectives, and are reviewed
and approved by the Remuneration Committee.
Aberdeen has a deferral policy which is intended to assist in the retention of
talent and to create additional alignment of executives' interests with
Aberdeen's sustained performance and, in respect of the deferral into funds,
managed by Aberdeen, to align the interest of asset managers with our clients.
Staff performance is reviewed formally at least once a year. The review process
evaluates the various aspects that the individual has contributed to Aberdeen,
and specifically, in the case of portfolio managers, to the relevant investment
team. Discretionary bonuses are based on client service, asset growth and the
performance of the respective portfolio manager. Overall participation in team
meetings, generation of original research ideas and contribution to presenting
the team externally are also evaluated.
In the calculation of a portfolio management team's bonus, Aberdeen takes into
consideration investment matters (which include the performance of funds,
adherence to the company investment process, and quality of company meetings) as
well as more subjective issues such as team participation and effectiveness at
client presentations. To the extent performance is factored in, such performance
is not judged against any specific benchmark and is evaluated over the period of
a year - January to December. The pre- or after-tax performance of an individual
account is not considered in the determination of a portfolio manager's
discretionary bonus; rather the review process evaluates the overall performance
of the team for all of the accounts the team manages.
Portfolio manager performance on investment matters is judged over all of the
accounts the portfolio manager contributes to and is documented in the appraisal
process. A combination of the team's and individual's performance is considered
and evaluated.
Although performance is not a substantial portion of a portfolio manager's
compensation, Aberdeen also recognizes that fund performance can often be driven
by factors outside one's control, such as (irrational) markets, and as such pays
attention to the effort by portfolio managers to ensure integrity of our core
process by sticking to disciplines and processes set, regardless of momentum and
'hot' themes. Short-terming is thus discouraged and trading-oriented managers
will thus find it difficult to thrive in the Aberdeen environment. Additionally,
if any of the aforementioned undue risks were to be taken by a portfolio
manager, such trend would be identified via Aberdeen's dynamic compliance
monitoring system.
(A)(4) DISCLOSURE OF SECURITIES OWNERSHIP
INFORMATION PROVIDED AS OF DECEMBER 31, 2015
Name of Portfolio Dollar ($) Range of
----------------- -------------------
Manager or Fund Shares
---------- ------------
Team Member Beneficially Owned
----------- -------------------
Devan Kaloo $0
Joanne Irvine $0
Peter Taylor $0
Brett Diment $0
Max Wolman $0
(B) Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
REGISTRANT PURCHASES OF EQUITY SECURITIES
---------------------------------------------------------------------------------------------------
(A) TOTAL (C) TOTAL NUMBER OF (D) MAXIMUM NUMBER (OR
NUMBER OF (B) AVERAGE SHARES (OR UNITS) APPROXIMATE DOLLAR VALUE) OF
SHARES (OR PRICE PAID PER PURCHASED AS PART OF SHARES (OR UNITS) THAT MAY YET
UNITS) SHARE (OR PUBLICLY ANNOUNCED BE PURCHASED UNDER THE PLANS
PERIOD PURCHASED UNIT) PLANS OR PROGRAMS OR PROGRAMS
---------------------------------------------------------------------------------------------------
Month #1
(09/01/2015 -
09/30/2015) 0 0 0 266,389
v---------------------------------------------------------------------------------------------------
Month #2
(10/01/2015 - 11,823 $13.9745 11,823 254,566
10/31/2015)
---------------------------------------------------------------------------------------------------
Month #3
(11/01/2015 - 13,270 $13.8505 25,093 241,296
11/30/2015)
---------------------------------------------------------------------------------------------------
Month #4
(12/01/2015 - 13,353 $13.3760 38,446 227,943
12/31/2015)
Total 38,446 $13.7238 38,446 227,943
---------------------------------------------------------------------------------------------------
On September 15, 2015, the Registrant commenced a share repurchase
program. The program will continue until the earlier of (i) the repurchase of
266,389 common shares, or (ii) six months from implementation of the
registrant's share repurchase program. For the reporting period, the Registrant
repurchased 38,446 of its shares at a weighted average discount of 15.14% from
net asset value per share. The Registrant expects to continue to repurchase its
outstanding shares until the earlier of (the repurchase of an additional 227,943
common shares (for an aggregate of 266,389), or (ii) March 15, 2016.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR
270.30a-3(c))) are effective, as of a date within 90 days of the filing
date of the report that includes the disclosure required by this
paragraph, based on their evaluation of these controls and procedures
required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and
Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as
amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the registrant's second fiscal quarter
of the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section
302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section
906 of the Sarbanes- Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust/Aberdeen Emerging Opportunity Fund
---------------------------------------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: February 23, 2016
-------------------
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/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: February 23, 2016
-------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: February 23, 2016
-------------------
* Print the name and title of each signing officer under his or her signature.