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
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
(Exact name of registrant as specified in charter)
1001 Warrenville Road, Suite 300
LISLE, IL 60532
(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
1001 Warrenville Road, Suite 300
LISLE, IL 60532
(Name and address of agent for service)
registrant's telephone number, including area code: (630) 241-4141
Date of fiscal year end: DECEMBER 31
Date of reporting period: JUNE 30, 2008
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.
(GRAPHIC)
(FIRST TRUST LOGO)
SEMI-ANNUAL REPORT
FOR THE SIX MONTHS ENDED
JUNE 30, 2008
FIRST TRUST/
ABERDEEN
EMERGING
OPPORTUNITY
FUND
(ABERDEEN ASSET MANAGEMENT LOGO)
TABLE OF CONTENTS
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
SEMI-ANNUAL REPORT
JUNE 30, 2008
Shareholder Letter ........................................................ 1
At A Glance ............................................................... 2
Portfolio Commentary ...................................................... 3
Portfolio of Investments .................................................. 8
Schedule of Forward Foreign Currency Contracts ............................ 14
Statement of Assets and Liabilities ....................................... 15
Statement of Operations ................................................... 16
Statements of Changes in Net Assets ....................................... 17
Statement of Cash Flows ................................................... 18
Financial Highlights ...................................................... 19
Notes to Financial Statements ............................................. 20
Additional Information .................................................... 26
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Aberdeen Asset Management Inc. ("Aberdeen" or
the "Sub-Advisor") and their respective representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust/Aberdeen Emerging Opportunity Fund (the "Fund") to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. When evaluating the information
included in this report, you are cautioned not to place undue reliance on these
forward-looking statements, which reflect the judgment of the Advisor and/or
Sub-Advisor and their respective representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Notes to
Financial Statements for a discussion of other risks of investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Aberdeen are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in the prospectus, the statement of additional information, this
report and other regulatory filings.
SHAREHOLDER LETTER
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
SEMI-ANNUAL REPORT
JUNE 30, 2008
Dear Shareholders:
The first half of 2008 has been challenging for the financial markets and for
many investors. Yet, regardless of the market, First Trust Advisors L.P. ("First
Trust") believes that in order to be successful in reaching your financial
goals, you should be invested for the long term. We also believe that investors
should seek professional help from a financial advisor who has been through many
types of markets, knows the range of investments available, and is committed to
bringing you investments suitable to your particular situation.
Our goal at First Trust has always been to offer a wide range of investment
products, including our family of closed-end funds, to help financial advisors
give you the opportunity to meet your financial objectives. We have continued to
expand our product line to ensure that you have many choices to fit your
investment needs.
The report you hold contains detailed information about your investment in First
Trust/Aberdeen Emerging Opportunity Fund (the "Fund"). It contains a portfolio
commentary from the Fund's portfolio management team that provides a market
recap for the period, a performance analysis and a market and Fund outlook.
Additionally, the report provides the Fund's financial statements for the period
covered by this report. I encourage you to read this document and discuss it
with your financial advisor.
First Trust has been through many types of markets and remains committed to
bringing you quality investment solutions regardless of the inevitable ups and
downs experienced in the market. We offer a variety of products that may fit
many financial plans to help those investors seeking long-term investment
success. As well, we are committed to making available up-to-date information
about your investments so you and your financial advisor are always current on
your portfolio.
We continue to value our relationship with you, and we thank you for the
opportunity to assist you in achieving your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
President of First Trust/Aberdeen
Emerging Opportunity Fund
Page 1
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
"AT A GLANCE"
AS OF JUNE 30, 2008 (UNAUDITED)
FUND STATISTICS
Symbol on New York Stock Exchange FEO
Common Share Price $17.45
Common Share Net Asset Value ("NAV") $20.49
Premium (Discount) to NAV (14.84)%
Net Assets Applicable to Common Shares $121,014,501
Current Quarterly Distribution per Common Share (1) $0.390
Current Annualized Distribution per Common Share $1.560
Current Distribution Rate on Closing Common Share Price (2) 8.94%
Current Distribution Rate on NAV (2) 7.61%
COMMON SHARE PRICE & NAV(WEEKLY CLOSING PRICE)
(PERFORMANCE GRAPH)
Market NAV
------ -----
6/29/07 19 21.54
7/6/07 19.15 21.91
7/13/07 19.5 22.29
7/20/07 19.28 22.22
7/27/07 18.5 21.33
8/3/07 18.16 21.21
8/10/07 17.98 20.96
8/17/07 16.69 20.02
8/24/07 17.73 20.77
8/31/07 18.05 21.02
9/7/07 18.22 20.97
9/14/07 18.5 21.38
9/21/07 18.56 21.58
9/28/07 18.82 22.09
10/5/07 18.96 22.51
10/12/07 19.17 22.79
10/19/07 18.97 22.49
10/26/07 19.32 23.11
11/2/07 19.39 22.99
11/9/07 19.11 22.45
11/16/07 18.8 22.32
11/23/07 18.35 21.79
11/30/07 18.9 22.11
12/7/07 19.45 22.63
12/14/07 19.25 22.24
12/21/07 18.32 21.54
12/28/07 19.36 21.7
1/4/08 19.1 21.44
1/11/08 18.8 21.69
1/18/08 18.13 21.08
1/25/08 17.79 20.91
2/1/08 18.53 21.36
2/8/08 18.1 20.99
2/15/08 18.35 21.25
2/22/08 18.53 21.45
2/29/08 18.4 21.47
3/7/08 17.92 21.11
3/14/08 18.05 21.02
3/20/08 17.21 20.45
3/28/08 17.52 20.64
4/4/08 18.11 21.09
4/11/08 17.82 21.1
4/18/08 18.26 21.47
4/25/08 18.32 21.5
5/2/08 18.69 21.82
5/9/08 18.69 21.53
5/16/08 18.75 21.99
5/23/08 18.76 21.67
5/30/08 19.01 21.89
6/6/08 18.86 21.52
6/13/08 18.8 21.21
6/20/08 18.15 20.59
6/27/08 17.52 20.42
6/30/08 17.45 20.49
PERFORMANCE
Average Annual
Total Return
6 Months Ended 1 Year Ended Inception (8/28/2006)
6/30/2008 6/30/2008 to 6/30/2008
-------------- ------------ ---------------------
Fund Performance
NAV (3) -1.29% 5.26% 13.09%
Market Value (4) -6.50% 1.63% 1.06%
Index Performance
Blended Benchmark (5) -2.74% 8.32% 15.91%
Lehman Global Emerging Markets
Index 0.68% 5.47% 6.46%
FTSE All World Emerging Index -11.24% 4.89% 23.73%
% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
--------------- -----------
Brazil NTM - B Note, 6.00%, 8/15/10 2.7%
Samsung Electronics Company Ltd.,
Preference Shares 2.1
Republic of Equador, 10.00%,
8/15/30 1.7
Republic Orient Uruguay, 5.00%,
9/14/18 1.7
Peru Bono Soberano 1.7
Republic of Venezuela, 5.75%,
2/26/16 1.6
Companhia Vale do Rio Doce, ADR 1.4
Taiwan Semiconductor Manufacturing
Company, Ltd. 1.3
Taiwan Mobile Company, Ltd. 1.3
Petroleo Brasileiro SA, ADR 1.3
----
Total 16.8%
====
% OF TOTAL
CREDIT QUALITY (7) BONDS & NOTES
------------------ -------------
A+ 2.1%
AAA 1.9
BBB+ 3.3
BBB- 5.6
BB+ 10.8
BB 6.1
BB- 26.7
B+ 12.3
B 2.1
B- 4.0
NR 25.1
-----
Total 100.0%
=====
% OF TOTAL
TOP 10 COUNTRIES (6) INVESTMENTS
-------------------- -----------
Brazil 13.1%
Mexico 8.5
Russia 6.7
China 6.1
Indonesia 6.0
Venezuela 5.0
Turkey 4.3
Argentina 4.0
Ukraine 3.4
Taiwan 3.4
----
Total 60.5%
====
% OF TOTAL
INDUSTRY CLASSIFICATION INVESTMENTS
----------------------- -----------
Government Bonds and Notes 39.5%
Commercial Banks 10.3
Oil, Gas & Consumable Fuels 6.0
Diversified Financial Services 5.7
Semiconductors & Semiconductor 3.4
Beverages 2.7
Food & Staples Retailing 2.7
Wireless Telecommunication Services 2.5
Metals & Mining 2.3
Electric Utilities 2.2
Household Products 1.9
Multiline Retail 1.8
Tobacco 1.8
Other 17.2
-----
Total 100.0%
=====
(1) Most recent distribution paid or of record through 6/30/08. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or of record through the report date and then dividing by
Common Share price or NAV, as applicable, as of 6/30/08.
(3) Total return based on NAV is the combination of reinvested dividend
distributions and reinvested capital gain distributions, if any, at prices
obtained by the Dividend Reinvestment Plan and changes in NAV per share and
does not reflect sales load. Past performance is not indicative of future
results.
(4) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share price. Past performance is not indicative of future results.
(5) Blended benchmark consists of the following:
JPMorgan Emerging Markets Bond Index - Global Diversified (32.5%); JPMorgan
Government Bond Index - Emerging Markets (32.5%); MSCI (Morgan Stanley
Capital International) Global Emerging Markets Index (35.0%).
(6) Fixed-income portfolio securities are included in a country based upon
their underlying credit exposure as determined by Aberdeen Asset Management
Inc., the investment sub-advisor.
(7) The credit quality information represented reflects the ratings assigned by
one or more nationally recognized statistical rating organizations
(NRSROs). For situations in which a security is rated by one or more NRSROs
and ratings are not equivalent, the ratings are averaged.
Page 2
PORTFOLIO COMMENTARY
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 Asset Management PLC 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 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 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. Included below is
additional information about 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 EMERGING MARKET EQUITY FOR THE ABERDEEN GROUP
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. Mr. Kaloo began
his career at Martin Currie in Edinburgh shortly after graduation, working
initially on the North American desk before transferring to the global asset
allocation team. Mr. Kaloo moved off the global asset allocation team in 1997,
and for the next three years, he worked on Asian portfolios before joining
Murray Johnstone in Singapore in July 2000. Following the latter's acquisition,
he transferred to the Aberdeen Group where he was responsible for the Asian ex
Japan region as well as regional portfolios within emerging market mandates and
technology stocks. Mr. Kaloo took his current position in July 2005. Mr. Kaloo
graduated with an MA (Hons) in Management and International Relations from St.
Andrews University in Scotland and holds a postgraduate degree in Investment
Analysis from Stirling University, also in Scotland.
JOANNE IRVINE
HEAD OF GEM EQUITY TEAM EX ASIA
Ms. Irvine is on the GEM Equity Team, where she specializes in the emerging
markets of Europe, Africa and the Middle East. After qualifying as a chartered
accountant in 1992, she worked in corporate finance, specializing in raising
development capital finance for private businesses. In January 1996, Ms. Irvine
joined the Aberdeen Group in a group development role. Since May 1997, Ms.
Irvine has been part of Aberdeen's emerging markets fund management group in
London.
MARK GORDON-JAMES
INVESTMENT MANAGER, GEM EQUITY TEAM
After graduating with a degree in Geography and Economics from the London School
of Economics in 2000, Mr. Gordon-James worked with the emerging markets team of
Merrill Lynch Investment Managers. Mr. Gordon-James joined the Aberdeen Group in
April 2004.
FIONA MORRISON
INVESTMENT MANAGER, GEM EQUITY TEAM
Ms. Morrison is an investment manager on the emerging markets ex Asia team. She
has a BA with honors in History and French from Durham University, England. Ms.
Morrison joined Aberdeen in 2001 as an analyst.
ANDY BROWN
INVESTMENT MANAGER, GEM EQUITY TEAM
Mr. Brown is an assistant investment manager on the emerging markets ex Asia
desk. He graduated from the University of St. Andrews with a BSc in Geography in
June 2003. Prior to joining Aberdeen in March 2005, Mr. Brown worked in the oil
field consumables industry in the United Arab Emirates.
Page 3
PORTFOLIO COMMENTARY - (CONTINUED)
FIXED-INCOME MANAGEMENT TEAM
BRETT DIMENT
HEAD OF EMERGING MARKET DEBT
Mr. Diment joined Deutsche Asset Management Group Limited ("Deutsche") in 1991
as a member of the fixed-income group and became head of the emerging market
debt team at Deutsche in 1999. Mr. Diment joined Aberdeen following the Deutsche
acquisition in 2005 and is now responsible for the day-to-day management of the
emerging market debt team and portfolios.
KEVIN DALY
PORTFOLIO MANAGER, EMERGING MARKET DEBT
Mr. Daly joined the emerging markets team at Aberdeen in April 2007 as a
portfolio manager, having spent the previous 10 years at Standard & Poor's in
London and Singapore as a credit market analyst covering global emerging market
debt, and was head of marketing for Global Sovereign Ratings. Mr. Daly was a
regular participant on the Global Sovereign Committee, served as a member of the
Sovereign Ratings Review Board, and was one of the initial members of the
Emerging Market Council, formed in 2006 to advise senior management on business
and market developments in emerging markets.
EDWIN GUTIERREZ
PORTFOLIO MANAGER, EMERGING MARKET DEBT
Mr. Gutierrez has served as an economist specializing in Latin America at LGT
Asset Manager, and more recently as a portfolio manager specializing in emerging
market fixed-income at Invesco Asset Management. He joined Deutsche in 2000 and
Aberdeen in 2005.
NIMA TAYEBI
PORTFOLIO MANAGER, EMERGING MARKET DEBT
Mr. Tayebi has 10 years of experience as executive director responsible for
emerging markets trading at Millennium Global Investments, vice president at
Salomon Brothers, focusing on emerging currency and debt trading and head of
fixed-income research at Renaissance Capital. He joined Deutsche as an emerging
currency portfolio manager in 2001 and Aberdeen in 2005.
MAX WOLMAN
PORTFOLIO MANAGER, EMERGING MARKET DEBT
Mr. Wolman joined Aberdeen in January 2001 and is portfolio manager on the
Global Emerging Market Debt mandates. Mr. Wolman originally specialized in
currency and domestic debt analysis; however, he is now responsible for wider
emerging debt analysis, including external and corporate issuers. He is a member
of the Emerging Markets Debt investment committee at Aberdeen and is also
responsible for the daily implementation of the investment process.
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
The primary investment objective of First Trust/Aberdeen Emerging Opportunity
Fund ("FEO" or the "Fund") is to seek 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.
MARKET RECAP - EQUITY
Emerging equities fell on volatile trading during the first half of 2008, after
outpacing developed markets last year, as resurgent credit concerns and growing
stagflation fears led investor sentiment to swing wildly. Worries that
escalating oil prices would crimp corporate earnings added gloom to an already
bleak global growth outlook. The U.S. Federal Reserve's successive interest rate
cuts and the bailout of investment bank Bear Stearns inspired short-lived
rebounds, but that failed to shore up investor sentiment as the credit contagion
spread and inflationary pressures persisted.
The relentless spike in food and fuel costs drove inflation to record highs.
Several central banks reluctantly tightened policies to stem inflation, while
authorities in other countries such as India and Malaysia raised fuel prices to
relieve subsidy burdens. Elsewhere, Mexico froze prices on 150 basic foods until
year-end, and in Chile, the government announced $1 billion (U.S.) in emergency
subsidies to alleviate the impact of the high oil prices.
Page 4
PORTFOLIO COMMENTARY - (CONTINUED)
Despite these difficulties, economic growth figures remained robust, with
first-quarter Gross Domestic Product ("GDP") figures in most developing
countries meeting or surpassing expectations, largely owing to still-healthy
domestic consumption and exports. On the flip side, lower mining output, hit by
power cuts, and weaker consumer spending weighed on South Africa; Brazil's
expansion slowed as companies cut investments; and the Czech Republic was
dragged down by lower household and government expenditure.
The political backdrop has been similarly mixed. Turkish authorities detained
two prominent retired generals, among others, for allegedly plotting a coup
against the government; and the ruling AK Party was subject to a court ruling
which threatened its existence. In South Africa, ruling party leader Jacob Zuma
will know in September 2008, if a multi-million Rand graft case against him will
be dropped and his path to the presidency cleared. Elsewhere, Taiwanese
opposition leader, the Kuomintang's Ma Ying-jeou, replaced Chen Shui-bian as
president after winning the election by a landslide. Thai Prime Minister Samak
Sundaravej survived a no-confidence vote a few months after winning last
December's election, while a similar motion against Malaysian Prime Minister
Abdullah Badawi was dropped. In Korea, President Lee Myung-bak apologized for
his controversial decision to resume U.S. beef imports, while his cabinet
offered to resign amid violent protests.
MARKET RECAP - FIXED-INCOME
Emerging fixed-income markets had a mixed performance over the period. Early
gains were erased by a bout of global risk aversion, but prices rebounded in the
aftermath of the takeover of Bear Stearns in mid-March 2008, only to falter
again in late June 2008 amid concerns about rising global inflation. Overall,
the spread on the JPMorgan Emerging Markets Bond Index-Global Diversified during
the six-month period ended June 30, 2008 increased 54 basis points ("bps") to
+318, having touched a near three-year high of +348 on March 17, 2008, which
marked the day when JPMorgan announced it would acquire Bear Stearns.
BRAZIL
The Fund's core holdings in Brazil performed strongly over the six-month period
ended June 30, 2008, though more recently we have taken advantage of market
strength following the move to investment-grade bonds by taking profits on some
of our external debt position. Overall the news has been very positive in
Brazil, which joined Mexico and Chile as the only investment-grade credits in
the region after the Standard & Poor's upgrade in April 2008. The fiscal and
external accounts remain robust, foreign direct investment climbed to a record
level, and the growth outlook has continued on a healthy path despite the
slowdown in global growth. The one downside to the strong domestic demand story,
however, has been inflation, with the annual rate exceeding the official target
of 4.5% by over 100 bps. Rising inflation has prompted the central bank to hike
the benchmark rate 50 bps on two occasions to 12.25%. With inflation continuing
to press higher and more rate hikes in the pipeline for 2008, local rates have
been notably weaker in recent weeks. The market is pricing in another 250 bps of
rate hikes this year, which we think provides sufficient cushion to remain long
local rates, with the 10-year rate now above 14%.
ARGENTINA
Our positions in Argentine debt have underperformed amid little change in
economic policy following the Presidential election that passed the torch from
Nestor Kirchner to his wife, Cristina Kirchner, in December 2007. Concerns about
the policy framework, combined with the ongoing dispute with farmers over
increased agriculture export taxes, have put a big dent in Cristina Kirchner's
popularity and investor sentiment. The export taxes are one of the key elements
of the government's economic policy, which due to rising soft commodity prices
have led to significant increases in the fiscal and trade surpluses in 2008.
After a brisk period of growth in the first quarter, the economy for the rest of
2008 is likely to move slowly due to rising inflation and the impact from the
lingering dispute with the farmers. Negative headlines aside, default risk
remains low in Argentina, which has completed most of its debt financing for
2008 and has ample local resources, plus the support of Venezuela, to meet its
2009 financing gap.
VENEZUELA
Venezuela country risk remains minimal despite record-high oil prices, as
political risk and concerns about new supply have weighed on performance over
the past year. President Chavez has been involved in a verbal battle with
Colombia over the recent deaths of several leaders of the FARC guerrilla group.
There have been claims that Chavez was secretly funding the FARC, which has
prompted Chavez to go on the offensive and threaten to curb trade ties with
Colombia, which would be damaging for both economies. Thus far, the trade
channel remains open. The dispute between state-owned oil company PDVSA and
Exxon-Mobil over compensation from the expropriation of its oil assets in the
Orinoco Basin in 2007 has yet to be resolved, although tensions appear to have
eased recently. Likewise, concerns about new supply have eased after $4 billion
of new bonds were issued in April 2008. The deal was split into two issues,
maturing in 2023 and 2028, and was placed with local investors to fulfill the
pent-up demand for dollar assets, which in turn should ease pressure on the
parallel exchange rate. While oil prices are at record highs, the market seems
to have drawn more comfort that Venezuela may be scaling back new issuance in
2008 and using some of the proceeds to buy back debt.
Page 5
PORTFOLIO COMMENTARY - (CONTINUED)
TURKEY
Turkey's inflation outlook has deteriorated significantly in recent months,
primarily due to higher food and fuel prices. With annual inflation approaching
double digits, which is well above the Central Bank's original 4% inflation
target, the Central Bank initiated a rate hiking cycle by raising rates 50 bps
at its May 2008 meeting. The Central Bank of Turkey ("CBT") adopted a much more
cautious stance in its quarterly inflation report, increasing its forecast to
9.30% for 2008 from 5.50% previously, and to 6.70% for 2009 from 3.70%. A
deteriorating macro outlook and rising political risk, with the Constitutional
Court mulling the closure of the ruling AKP party due to anti-secular
activities, has provided a negative backdrop for Turkish assets. While the lira
has been fairly resilient recently, it has weakened on the year by 5% while the
yield on the benchmark March '12s has widened 600 bps to around 22%. (The "March
'12s" refer to a bond that is one of the most liquid bonds on the yield curve
which investors buy and sell.) Despite the political issues and revised
inflation targets, Turkish domestic bonds potentially offer value from these
levels following the sell-off.
ASIA
The performance of external debt was mixed, with the Philippines posting a
positive gain while Indonesia lagged, as new supply from the latter weighed on
existing spreads. Rising inflation and dovish comments from Bank Indonesia
weighed on our local rates position, though sentiment has improved recently due
to a shift in monetary policy.
FUND RECAP
The Fund had a net asset value ("NAV") total return of -1.29%(1) and a market
value total return of -6.50%(2) for the six months ended June 30, 2008, compared
to the Fund's blended benchmark(3) total return of -2.74% over the same period.
In addition to this blended benchmark, the Fund currently uses other indexes for
comparative purposes. The total returns over the six months ended June 30, 2008,
for these indexes were as follows: the Lehman Global Emerging Markets Index was
0.68%; and the FTSE All World Emerging Index was -11.24%.
PERFORMANCE ANALYSIS - EQUITY
The benchmark for the equity portion of the Fund, the MSCI Global Emerging
Markets Index, fell 11.60% over the six-month period ended June 30, 2008.
Against this the equity portion of the Fund fell 378 bps, representing an
outperformance of 782 bps. Generally, the Fund's investment process, with its
focus on businesses with strong balance sheets and cashflows at reasonable
valuations, served the Fund's portfolio well as investor focus sharpened on
fundamentals.
The main source of this good relative performance came in Asia (+628 bps), with
outperformance coming from almost all markets. However, to draw attention to
some specific results: China and Korea saw a correction after a long period of
outperformance which had led to stretched valuations - hence, the Fund's
underweight to these markets - and added 205 bps and 109 bps outperformance,
respectively. India had a strong result, delivering 93 bps of outperformance as
the Fund's holdings, made up of companies with robust business models, held up
well in a falling market. Meanwhile, the Fund's bank holding in Taiwan, Fubon
Financial Holdings Company, Ltd., benefited as the sector re-rated upon news
that the Chinese government will allow Taiwanese banks the opportunity to invest
in the mainland, leading to 104 bps of outperformance.
Latin America was also a generator of outperformance (+204 bps). In Argentina
(+142 bps), the Fund's sole holding, high-grade steel pipe maker Tenaris, was a
beneficiary of increased capex from oil companies, while the Fund's holdings in
Mexico performed well as consumer demand remained resilient to the slowdown in
the U.S. However, the Fund's underweight to energy and materials giants
Petrobras and Vale cost the Fund 34 bps in Brazil.
Certain countries in Eastern Europe, the Middle East and Africa were detractors
from performance (-64 bps), with the Fund's underweight to commodity
heavyweights Russia and South Africa costing the Fund 47 bps and 54 bps,
respectively. Yet there were some bright spots - the team's stock selection in
Turkey led to 29 bps of outperformance and the Fund's sole holding in Qatar,
Qatar Insurance Company, led to 61bps of outperformance.
PERFORMANCE ANALYSIS - FIXED-INCOME
For the six-month period ended June 30, 2008, the fixed-income component of the
Fund returned 1.35%, compared to the benchmark(4) for the fixed-income portion
of the Fund returning 1.74%. The Fund outperformed the benchmark in local
denominated bonds, returning 5.81% compared to 3.78%, but underperformed the
benchmark in the external denominated debt, returning -1.70% compared to -0.28%
of the benchmark. The countries with the strongest local returns in the Fund
were Brazil, Mexico and Uruguay. This is due to investor confidence that
government officials from these countries will be successful at containing
inflationary pressures compared to other countries with similar pressures. The
Turkish local bonds had a negative return for the period due to rising inflation
and the potential closure of the ruling AKP party. The Fund had a zero weighting
in South African local bonds which turned out to be a prudent decision as the
benchmark returned -17.54% due to inflation worries caused by rising oil and
food prices and a large negative current account balance.
Page 6
PORTFOLIO COMMENTARY - (CONTINUED)
The Fund's external bond holdings underperformed the benchmark, returning -1.70%
compared to -0.28% for the benchmark. This was due to the Fund's overweight in
Argentina, which returned -12.05% as investors reduced their holdings in
Argentina due to the political situation and farmer strikes. Other countries
which had negative returns in external markets were Venezuela, El Salvador and
Indonesia. The only country which outperformed the benchmark was Russia. This
was due to the Fund's corporate bond holdings, which offered much higher yields
than the sovereign. Brazil external debt also had a strong return as investor
confidence grew after the upgrade by Standard & Poor's.
MARKET AND FUND OUTLOOK - EQUITY
We believe emerging stocks are likely to face downward pressure, predominantly
as a result of commodity-induced inflationary fears, lingering worries over the
credit markets and the extent to which developed economies will slow. Although
most developing economies have maintained a steady pace of expansion, growth
remains vulnerable to accelerating inflation. This complicates the outlook for
monetary policy, most notably in emerging Asia, where policymakers' reluctance
to tighten may impact future prospects. We remain cautious, and are optimistic
that the Fund's long-held strategy of investing in quality companies will stand
the portfolio in good stead over the coming months.
MARKET AND FUND OUTLOOK - FIXED-INCOME
Looking ahead, concerns about global inflation that have been exacerbated by
rising commodity prices will at times weigh on emerging market debt, in our
opinion. With inflation picking up in a number of countries such as Brazil,
Mexico, Turkey, Indonesia, Egypt and Russia, policy credibility will be tested.
A failure to give an appropriate and timely policy response to a deteriorating
inflation outlook could exert pressure on local rates. In the absence of tighter
monetary policy, central bankers may be more open to responding to imported
inflation by allowing for some currency appreciation, which could bode well for
emerging markets' fixed-income exposure.
----------
(1) Total return based on NAV is the combination of reinvested dividend
distributions and reinvested capital gains distributions, if any, at prices
obtained by the Dividend Reinvestment Plan, and changes in NAV per share
and does not reflect sales load.
(2) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan, and changes in Common
Share price.
(3) The Fund's blended benchmark consists of the following: 32.5% JPMorgan
Emerging Markets Bond Index-Global Diversified; 32.5% JPMorgan Government
Bond Index-Emerging Markets; and 35% MSCI (Morgan Stanley Capital
International) Global Emerging Markets Index.
(4) The benchmark for the fixed-income portion of the Fund consists of the
following: 50% JPMorgan Emerging Markets Bond Index-Global Diversified and
50% JPMorgan Government Bond Index-Emerging Markets (JPM GBI-EM).
Page 7
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS (a)
JUNE 30, 2008 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
------------- --------------------------------------------- ------ -------- ------------
BONDS AND NOTES (b) - 62.4%
ARGENTINA - 2.9%
480,000 Banco Hipotecario SA(USD) ................... 9.75% 04/27/16 $ 357,600
2,184,142 Republic of Argentina (ARS) (c) ............. 2.00% 01/03/10 1,428,659
2,230,000 Republic of Argentina (USD) ................. 7.00% 04/17/17 1,537,375
169,615 Republic of Argentina (USD) ................. 8.28% 12/31/33 130,010
-----------
3,453,644
-----------
BRAZIL - 6.6%
3,420,000 Brazil NTN - B Note (BRL) ................... 6.00% 08/15/10 3,568,362
460,000 Dasa Finance Corp. (USD) .................... 8.75% 05/29/18 462,875
470,000 Independencia International Ltd. (USD) ...... 9.88% 05/15/15 455,754
430,000 Independencia International Ltd. (USD) ...... 9.88% 01/31/17 420,862
1,000,000 Isa Capital do Brasil SA(USD) ............... 7.88% 01/30/12 1,037,500
2,500,000 Nota do Tesouro Nacional (BRL) .............. 10.00% 01/01/17 1,223,833
750,000 Odebrecht Finance Ltd. (USD) ................ 7.50% 10/18/17 760,800
-----------
7,929,986
-----------
CHINA - 1.0%
670,000 Parkson Retail Group Ltd. (USD) ............. 7.88% 11/14/11 671,675
540,000 Parkson Retail Group Ltd. (USD) ............. 7.13% 05/30/12 522,450
-----------
1,194,125
-----------
COLOMBIA - 2.0%
3,140,000,000 Republic of Colombia (COP) .................. 12.00% 10/22/15 1,583,374
720,000 Republic of Colombia (USD) .................. 7.38% 09/18/37 781,740
-----------
2,365,114
-----------
DOMINICAN REPUBLIC - 1.8%
820,000 Cerveceria Nacional Dominica (USD) (c) ...... 16.00% 03/27/12 848,700
1,310,000 Dominican Republic (USD) .................... 8.63% 04/20/27 1,349,300
-----------
2,198,000
-----------
ECUADOR - 2.5%
730,000 Republic of Ecuador (USD) ................... 9.38% 12/15/15 755,550
2,320,000 Republic of Ecuador (USD) ................... 10.00% 08/15/30 2,273,600
-----------
3,029,150
-----------
EGYPT - 1.7%
2,140,000 Egypt Government Bond (EGP) ................. 9.10% 09/20/12 387,812
4,500,000 Egypt Treasury Bill (EGP) ................... 0.00% 08/19/08 833,079
4,900,000 Egypt Treasury Bill (EGP) ................... 0.00% 05/05/09 839,495
-----------
2,060,386
-----------
EL SALVADOR - 1.5%
420,000 Republic of El Salvador (USD) ............... 8.25% 04/10/32 464,100
1,350,000 Republic of El Salvador (USD) ............... 7.65% 06/15/35 1,404,000
-----------
1,868,100
-----------
GABON - 1.3%
1,480,000 Gabonese Republic (USD) ..................... 8.20% 12/12/17 1,546,600
-----------
See Notes to Financial Statements
Page 8
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JUNE 30, 2008 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
------------- --------------------------------------------- ------ -------- ------------
BONDS AND NOTES (b) - (CONTINUED)
GEORGIA - 1.2%
1,510,000 Republic of Georgia (USD) ................... 7.50% 04/15/13 $ 1,507,803
-----------
GHANA - 1.0%
1,130,000 Republic of Ghana (USD) ..................... 8.50% 10/04/17 1,159,962
-----------
INDONESIA - 4.8%
380,000 Empire Capital Resources Pte. Ltd. (USD) .... 9.38% 12/15/11 402,606
7,400,000,000 Indonesian Government (IDR) ................. 11.00% 12/15/12 748,116
650,000,000 Indonesian Government (IDR) ................. 12.50% 03/15/13 68,990
7,900,000,000 Indonesian Government (IDR) ................. 9.00% 09/15/13 725,706
1,850,000,000 Indonesian Recapitalization Bond (IDR) ...... 13.40% 02/15/11 204,517
9,350,000,000 Indonesian Recapitalization Bond (IDR) ...... 13.45% 08/15/11 1,033,232
2,500,000,000 Indonesian Recapitalization Bond (IDR) ...... 13.18% 07/15/12 272,793
700,000 Majapahit Holding BV (USD) .................. 7.75% 10/17/16 657,796
670,000 Majapahit Holding BV (USD) .................. 7.25% 06/28/17 598,028
350,000 MGTI Finance Company, Ltd. (USD) ............ 8.38% 09/15/10 350,403
410,000 Republic of Indonesia (USD) ................. 6.88% 03/09/17 393,034
370,000 Republic of Indonesia (USD) ................. 8.50% 10/12/35 388,976
-----------
5,844,197
-----------
KAZAKHSTAN - 1.5%
1,000,000 Halyk Savings Bank of Kazakhstan (USD) ...... 8.13% 10/07/09 1,022,300
800,000 KazMunaiGaz Finance (USD) ................... 9.13% 07/02/18 806,600
-----------
1,828,900
-----------
MEXICO - 4.0%
190,000 Desarrolladora Homex SA (USD) ............... 7.50% 09/28/15 191,900
8,941,460 Mexico Cetes (MXN) .......................... 0.00% 10/23/08 844,580
15,900,000 Mexico Cetes (MXN) .......................... 0.00% 11/06/08 1,497,049
18,100,000 Mexican Bonos Desarr Fixed Rate Bond (MXN) .. 7.25% 12/15/16 1,556,623
800,000 Pemex Project Funding Master Trust (USD) .... 6.63% 06/15/38 790,000
-----------
4,880,152
-----------
NIGERIA - 1.8%
790,000 GTB Finance BV (USD) ........................ 8.50% 01/29/12 766,300
174,000,000 KfW International Finance (NGN) ............. 8.50% 01/18/11 1,451,164
-----------
2,217,464
-----------
PAKISTAN - 0.5%
270,000 Islamic Republic of Pakistan (USD) .......... 6.75% 02/19/09 264,384
100,000 Islamic Republic of Pakistan (USD) .......... 6.88% 06/01/17 74,250
390,000 Pakistan Mobile Communication (USD) ......... 8.63% 11/13/13 321,825
-----------
660,459
-----------
PANAMA - 0.3%
290,000 Republic of Panama (USD) .................... 8.88% 09/30/27 366,821
-----------
PERU - 1.8%
6,040,000 Peru Bono Soberano (PEN) .................... 7.84% 08/12/20 2,166,976
-----------
See Notes to Financial Statements
Page 9
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JUNE 30, 2008 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
------------- --------------------------------------------- ------ -------- ------------
BONDS AND NOTES (b) - (CONTINUED)
PHILIPPINES - 2.8%
480,000 Republic of Philippines (USD) ............... 8.25% 01/15/14 $ 519,912
100,000 Republic of Philippines (USD) ............... 8.00% 01/15/16 107,500
330,000 Republic of Philippines (USD) ............... 9.38% 01/18/17 389,240
850,000 Republic of Philippines (USD) ............... 10.63% 03/16/25 1,140,812
970,000 Republic of Philippines (USD) ............... 9.50% 02/02/30 1,185,825
-----------
3,343,289
-----------
RUSSIA - 6.2%
830,000 Alfa Bond ISS (USD) (c) ..................... 8.64% 02/22/17 768,041
390,000 Evraz Group SA (USD) ........................ 8.88% 04/24/13 389,142
780,000 Evraz Group SA (USD) ........................ 8.25% 11/10/15 767,325
10,400,000 GPB Eurobond Finance PLC (RUB) .............. 7.25% 02/22/10 442,083
1,000,000 Mobile Telesystems Finance (USD) ............ 8.38% 10/14/10 1,026,100
39,099,565 Red Arrow International Leasing PLC (RUB) ... 8.38% 06/30/12 1,662,861
830,000 RS Finance (RSB) (USD) ...................... 7.50% 10/07/10 775,129
700,000 RSHB Capital SA (USD) ....................... 7.75% 05/29/18 688,415
1,000,000 UBS Luxembourg (USD) ........................ 8.00% 02/11/10 1,015,000
-----------
7,534,096
-----------
SERBIA - 0.7%
840,000 Republic of Serbia (USD) (d) ................ 3.75% 11/01/24 789,894
-----------
TURKEY - 1.9%
1,380,000 Turkey Government Bond,
Inflation Adjusted Bond (TRY) (e) ........ 10.00% 02/15/12 1,211,518
1,490,000 Turkey Government Bond (TRY) ................ 16.00% 03/07/12 1,056,284
-----------
2,267,802
-----------
UKRAINE - 3.7%
800,000 Alfa Bank Ukraine (USD) ..................... 9.75% 12/22/09 786,720
1,070,000 EX-IM Bank of Ukraine (USD) ................. 7.65% 09/07/11 1,037,367
4,000,000 JSCB Ukrsotsbank, Credit Linked Note (USD) .. 12.00% 10/15/12 880,985
500,000 UBS AG Jersey Branch (USD) .................. 9.13% 06/21/10 470,000
1,480,000 Ukraine Government International Bond (USD).. 6.75% 11/14/17 1,329,040
-----------
4,504,112
-----------
URUGUAY - 3.5%
380,000 Republic of Uruguay (USD) ................... 8.00% 11/18/22 410,780
1,170,000 Republic Orient Uruguay (USD) ............... 7.63% 03/21/36 1,197,495
37,710,000 Republic Orient Uruguay
Inflation Adjusted Bond (UYU) (e) ........ 5.00% 09/14/18 2,177,411
8,560,000 Republic Orient Uruguay
Inflation Adjusted Bond (UYU) (e) ........ 4.25% 04/05/27 464,236
-----------
4,249,922
-----------
See Notes to Financial Statements
Page 10
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JUNE 30, 2008 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
------------- --------------------------------------------- ------ -------- ------------
BONDS AND NOTES (b) - (CONTINUED)
VENEZUELA - 5.4%
470,000 Bolivarian Republic of Venezuela (USD) ...... 9.00% 05/07/23 $ 413,318
2,360,000 Petroleos de Venezuela SA (USD) ............. 5.25% 04/12/17 1,646,100
1,209,000 Republic of Venezuela (USD) ................. 10.75% 09/19/13 1,261,773
1,140,000 Republic of Venezuela (USD) ................. 8.50% 10/08/14 1,082,259
2,680,000 Republic of Venezuela (USD) ................. 5.75% 02/26/16 2,118,540
-----------
6,521,990
-----------
TOTAL BONDS AND NOTES
(Cost $75,542,160) ....................... 75,488,944
-----------
SHARES DESCRIPTION VALUE
------------- ----------------------------------------------------------------- ------------
COMMON STOCKS - 45.8%
ARGENTINA - 1.4%
23,200 Tenaris SA, ADR ................................................. $ 1,728,400
------------
BRAZIL - 7.6%
78,450 Banco Bradesco SA, ADR .......................................... 1,605,087
62,000 Companhia Vale do Rio Doce, ADR ................................. 1,850,080
56,370 Lojas Renner SA ................................................. 1,114,671
29,892 Petroleo Brasileiro SA, ADR ..................................... 1,732,241
43,000 Souza Cruz SA ................................................... 1,223,935
28,000 Telecomunicacoes de Sao Paulo SA ................................ 708,951
24,600 Ultrapar Participacoes SA, Preference Shares .................... 936,829
------------
9,171,794
------------
CHILE - 1.0%
29,000 Banco Santander Chile SA, ADR ................................... 1,247,290
------------
CHINA - 5.6%
110,000 China Mobile Ltd. ............................................... 1,478,466
190,000 CLPHoldings Ltd. ................................................ 1,627,749
350,000 Dah Sing Banking Group Ltd. ..................................... 621,243
200,000 Hang Lung Group Ltd. ............................................ 888,773
920,000 PetroChina Company Ltd., H Shares ............................... 1,191,699
490,000 Swire Pacific Ltd., B Shares .................................... 1,005,480
------------
6,813,410
------------
CZECH REPUBLIC - 1.0%
9,000 Erste Bank der Oesterreichischen Sparkassen AG .................. 560,930
3,000 Komercni Banka AS ............................................... 698,072
------------
1,259,002
------------
HUNGARY - 1.0%
5,300 Richter Gedeon, Sponsored GDR ................................... 1,147,305
------------
See Notes to Financial Statements
Page 11
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JUNE 30, 2008 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------- ----------------------------------------------------------------- ------------
COMMON STOCKS - (CONTINUED)
INDIA - 3.0%
60,000 Gail India Ltd. ................................................. $ 464,590
20,000 GlaxoSmithKline Pharmaceuticals Ltd. ............................ 517,978
8,000 Grasim Industries Ltd. (f) ...................................... 343,986
40,000 Hero Honda Motors Ltd. .......................................... 643,626
11,500 Housing Development Finance Corp. Ltd. .......................... 525,178
27,000 ICICI Bank Ltd. ................................................. 395,477
74,000 Satyam Computer Services Ltd. ................................... 751,352
------------
3,642,187
------------
INDONESIA - 1.7%
350,000 PT Astra International Tbk ...................................... 730,748
1,800,000 PT Unilever Indonesia Tbk ....................................... 1,317,787
------------
2,048,535
------------
MALAYSIA - 2.2%
85,000 British American Tobacco Malaysia Berhad ........................ 1,151,110
455,000 Public Bank Berhad .............................................. 1,476,052
------------
2,627,162
------------
MEXICO - 5.2%
37,900 Fomento Economico Mexicano, S.A.B. de C.V., Sponsored ADR ....... 1,724,829
34,000 Grupo Aeroportuario del Centro Norte, S.A.B. de C.V., ADR ....... 563,720
361,000 Grupo Continental, S.A.B. ....................................... 918,506
297,000 Grupo Financiero Banorte, S.A.B. de C.V., O Shares .............. 1,396,719
274,000 Kimberly-Clark de Mexico, S.A.B. de C.V., A Shares .............. 1,115,862
390,000 SARE Holding S.A.B. de C.V., B Shares (f) ....................... 510,894
------------
6,230,530
------------
PHILIPPINES - 0.8%
970,000 Bank of the Philippine Islands .................................. 929,057
------------
QATAR - 0.8%
16,000 Qatar Insurance Company ......................................... 988,875
------------
RUSSIA - 1.0%
12,500 LUKOIL, ADR ..................................................... 1,227,500
------------
SOUTH AFRICA - 1.9%
195,000 Massmart Holdings Ltd. .......................................... 1,536,590
257,000 Truworths International Ltd. .................................... 753,276
------------
2,289,866
------------
SOUTH KOREA - 3.2%
55,000 Pusan Bank ...................................................... 736,102
6,300 Samsung Electronics Company Ltd., Preference Shares ............. 2,716,218
850 Shinsegae Company Ltd. .......................................... 457,483
------------
3,909,803
------------
TAIWAN - 3.6%
855,000 Fubon Financial Holdings Company, Ltd. .......................... 873,225
946,451 Taiwan Mobile Company, Ltd. ..................................... 1,761,752
823,599 Taiwan Semiconductor Manufacturing Company, Ltd. ................ 1,763,712
------------
4,398,689
------------
See Notes to Financial Statements
Page 12
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JUNE 30, 2008 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------- ----------------------------------------------------------------- ------------
COMMON STOCKS - (CONTINUED)
THAILAND - 2.0%
220,000 PTT Exploration and Production Public Company Ltd. .............. $ 1,269,927
200,000 Siam Cement Public (The) Company Ltd. ........................... 1,190,369
------------
2,460,296
------------
TURKEY - 2.8%
344,000 Aksigorta AS .................................................... 1,158,192
27,000 Bim Birlesik Magazalar AS ....................................... 1,031,503
156,000 Cimsa Cimento Sanayi ve Ticaret AS .............................. 566,021
35,350 Migros Turk TAS ................................................. 583,534
------------
3,339,250
------------
TOTAL COMMON STOCKS
(Cost $45,267,070) .............................................. 55,458,951
------------
TOTAL INVESTMENTS - 108.2%
(Cost $120,809,230) (g) ......................................... 130,947,895
LOAN OUTSTANDING - (9.9)% ....................................... (12,000,000)
NET OTHER ASSETS AND LIABILITIES - 1.7% ......................... 2,066,606
------------
NET ASSETS - 100.0% ............................................. $121,014,501
============
----------
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) Fixed-income portfolio securities are included in a country based upon
their underlying credit exposure as determined by Aberdeen Asset Management
Inc., the investment sub-advisor.
(c) Variable rate security. The interest rate shown reflects the rate in effect
at June 30, 2008.
(d) Step-up security. A security where the coupon increases or steps up at a
predetermined date. Interest rate shown reflects the rate in effect at June
30, 2008.
(e) Security whose principal value is adjusted in accordance with changes in
the country's Consumer Price Index. Interest is calculated on the basis of
the current adjusted principal value.
(f) Non-income producing security.
(g) Aggregate cost for federal income tax and financial reporting purposes.
ADR American Depositary Receipt
GDR Global Depositary Receipt
RSB Russian Standard Bank
Currency
ARS Argentine Peso
BRL Brazilian Real
COP Colombian Peso
EGP Egyptian Pound
IDR Indonesian Rupiah
MXN Mexican Peso
NGN Nigerian Naira
PEN Peruvian New Sol
RUB Russian Ruble
TRY Turkish Lira
USD United States Dollar
UYU Uruguayan Peso
ZAR South African Rand
See Notes to Financial Statements
Page 13
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
JUNE 30, 2008 (UNAUDITED)
FORWARD FOREIGN CURRENCY CONTRACTS TO BUY
CONTRACTS TO RECEIVE NET NET
------------------------------------------ UNREALIZED UNREALIZED
IN APPRECIATION DEPRECIATION
EXPIRATION LOCAL VALUE IN EXCHANGE OF CONTRACTS OF CONTRACTS
DATE CURRENCY (a) U.S. $ FOR U.S. $ U.S. $ U.S. $
---------- ---------------- ---------- ---------- ------------ -------------
07/16/08 BRL 5,785,000 $3,593,510 $3,391,563 $201,947 $ --
07/16/08 RUB 51,314,000 2,187,175 2,161,955 25,220 --
07/16/08 TRY 2,597,000 2,108,044 2,043,389 64,655 --
07/16/08 ZAR 9,944,000 1,264,046 1,291,903 -- (27,857)
-------- --------
$291,822 $(27,857)
-------- --------
FORWARD FOREIGN CURRENCY CONTRACTS TO SELL
CONTRACTS TO DELIVER NET NET
--------------------------------------------- UNREALIZED UNREALIZED
IN APPRECIATION DEPRECIATION
EXPIRATION LOCAL VALUE IN EXCHANGE OF CONTRACTS OF CONTRACTS
DATE CURRENCY (a) U.S. $ FOR U.S. $ U.S. $ U.S. $
---------- ------------------- ---------- ---------- ------------ -------------
08/08/08 ARS 3,840,000 $1,253,693 $1,252,650 $ -- $ (1,043)
07/16/08 BRL 7,157,000 4,445,766 4,160,563 -- (285,203)
07/16/08 COP 3,267,714,000 1,699,851 1,783,687 83,836 --
07/16/08 MXN 1,162,000 112,395 112,011 -- (384)
07/16/08 RUB 51,314,000 2,187,175 2,178,014 -- (9,161)
07/16/08 TRY 2,597,000 2,108,044 1,971,146 -- (136,898)
07/16/08 ZAR 9,944,000 1,264,046 1,240,751 -- (23,295)
-------- ---------
$ 83,836 $(455,984)
-------- ---------
Unrealized Appreciation (Depreciation) ................... $375,658 $(483,841)
======== =========
Net Unrealized Appreciation (Depreciation) ............... $(108,183)
=========
(a) Please see page 13 for currency descriptions.
See Notes to Financial Statements
Page 14
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2008 (UNAUDITED)
ASSETS:
Investments, at value (Cost $120,809,230) ............................. $130,947,895
Cash .................................................................. 1,264,763
Foreign currency (Cost $211,995) ...................................... 218,044
Unrealized appreciation on forward foreign currency contracts ......... 375,658
Prepaid expenses ...................................................... 11,910
Receivables:
Interest ........................................................... 1,626,661
Investment securities sold ......................................... 203,458
Dividends .......................................................... 173,255
------------
Total Assets .................................................... 134,821,644
------------
LIABILITIES:
Unrealized depreciation on forward foreign currency contracts ......... 483,841
Payables:
Outstanding loan ................................................... 12,000,000
Investment securities purchased .................................... 929,200
Investment advisory fees ........................................... 111,992
Foreign capital gains tax .......................................... 81,969
Audit and tax fees ................................................. 42,854
Custodian fees ..................................................... 42,527
Printing fees ...................................................... 37,029
Legal fees ......................................................... 25,552
Interest and fees due on loan ...................................... 12,130
Administrative fees ................................................ 10,639
Transfer agent fees ................................................ 2,422
Trustees' fees and expenses ........................................ 966
Accrued expenses and other liabilities ................................ 26,022
------------
Total Liabilities ............................................... 13,807,143
------------
NET ASSETS ............................................................ $121,014,501
============
NET ASSETS CONSIST OF:
Paid-in capital ....................................................... $112,378,461
Par value ............................................................. 59,052
Accumulated net investment income (loss) .............................. (1,570,587)
Accumulated net realized gain (loss) on investments sold, forward
foreign currency contracts and foreign currency transactions ....... 100,530
Net unrealized appreciation (depreciation) on investments, forward
foreign currency contracts and foreign currency translation ........ 10,047,045
------------
NET ASSETS ............................................................ $121,014,501
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share) .. $ 20.49
============
Number of Common Shares outstanding (unlimited number of
Common Shares has been authorized) ................................. 5,905,236
============
See Notes to Financial Statements
Page 15
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 (UNAUDITED)
INVESTMENT INCOME:
Interest (net of foreign withholding tax of $11,204) .................. $ 3,598,194
Dividends (net of foreign withholding tax of $71,069) ................. 1,104,958
-----------
Total investment income ............................................ 4,703,152
-----------
EXPENSES:
Investment advisory fees .............................................. 673,744
Interest and fees on loan ............................................. 189,235
Custodian fees ........................................................ 107,026
Administrative fees ................................................... 66,814
Audit and tax fees .................................................... 27,404
Trustees' fees and expenses ........................................... 19,847
Transfer agent fees ................................................... 16,238
Other ................................................................. 33,446
-----------
Total expenses ..................................................... 1,133,754
-----------
NET INVESTMENT INCOME ................................................. 3,569,398
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments ........................................................ 287,118
Forward foreign currency contracts ................................. (589,936)
Foreign currency transactions ...................................... (65,970)
-----------
Net realized gain (loss) .............................................. (368,788)
-----------
Net change in unrealized appreciation (depreciation) on:
Investments (a) .................................................... (5,835,491)
Forward foreign currency contracts ................................. 144,848
Foreign currency translation ....................................... (1,515)
-----------
Net change in unrealized appreciation (depreciation) .................. (5,692,158)
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ............................... (6,060,946)
-----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ....... $(2,491,548)
===========
----------
(a) Change in unrealized appreciation (depreciation) on investments is net of
decrease in foreign capital gains tax payable of $29,019.
See Notes to Financial Statements
Page 16
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
6/30/2008 ENDED
(UNAUDITED) 12/31/2007
------------ ------------
OPERATIONS:
Net investment income (loss) ................................................ $ 3,569,398 $ 5,457,475
Net realized gain (loss) .................................................... (368,788) 5,521,591
Net change in unrealized appreciation (depreciation) ........................ (5,692,158) 6,302,219
------------ ------------
Net increase (decrease) in net assets resulting from operations ............. (2,491,548) 17,281,285
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ....................................................... (4,606,084) (4,640,236)
Net realized gain ........................................................... -- (6,048,241)
------------ ------------
Total distributions to shareholders ......................................... (4,606,084) (10,688,477)
------------ ------------
Total increase (decrease) in net assets ..................................... (7,097,632) 6,592,808
NET ASSETS:
Beginning of period ......................................................... 128,112,133 121,519,325
------------ ------------
End of period ............................................................... $121,014,501 $128,112,133
============ ============
Accumulated net investment income (loss) at end of period ................... $ (1,570,587) $ (533,901)
============ ============
See Notes to Financial Statements
Page 17
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets resulting from operations ........................ $ (2,491,548)
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash used by operating activities:
Purchases of investments ................................................. (47,528,117)
Sales and maturities of investments ...................................... 44,380,040
Net amortization/accretion of premium/discount on investments ............ (612,235)
Net realized gain/loss on investments .................................... (287,118)
Net change in unrealized appreciation/depreciation on investments ........ 5,835,491
CHANGES IN ASSETS AND LIABILITIES:
Decrease in net unrealized appreciation/depreciation on forward
foreign currency contracts ............................................ (144,848)
Increase in dividends receivable ......................................... (120,920)
Decrease in interest receivable .......................................... 8,105
Increase in prepaid expenses ............................................. (11,222)
Increase in receivable for investment securities sold .................... (73,083)
Increase in payable for investment securities purchased .................. 929,200
Decrease in interest and fees due on loan payable ........................ (4,264)
Decrease in investment advisory fees payable ............................. (4,402)
Decrease in audit and tax fees payable ................................... (20,661)
Decrease in legal fees payable ........................................... (24,158)
Decrease in printing fees payable ........................................ (31,911)
Decrease in transfer agent fees payable .................................. (1,895)
Decrease in administrative fees payable .................................. (1,000)
Decrease in custodian fees payable ....................................... (6,273)
Increase in Trustees'fees and expenses payable ........................... 197
Increase in accrued expenses and other liabilities ....................... 10,382
------------
CASH USED BY OPERATING ACTIVITIES ........................................... $ (200,240)
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders ..................................... (4,606,084)
Issuances of loan ........................................................ 4,000,000
------------
CASH USED BY FINANCING ACTIVITIES ........................................... (606,084)
------------
Decrease in cash and foreign currency (a) ................................... (806,324)
Cash and foreign currency at beginning of period ............................ 2,289,131
------------
Cash and foreign currency at end of period .................................. $ 1,482,807
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees ........................... $ 193,499
============
----------
(a) Includes net change in unrealized appreciation (depreciation) on foreign
currency of $6,909.
See Notes to Financial Statements
Page 18
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR PERIOD
6/30/2008 ENDED ENDED
(UNAUDITED) 12/31/2007 12/31/2006(a)
----------- ---------- -------------
Net asset value, beginning of period ........................................ $ 21.69 $ 20.58 $ 19.10(b)
-------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ................................................ 0.60 0.92 0.29
Net realized and unrealized gain (loss) ..................................... (1.02) 2.00 1.58
-------- -------- --------
Total from investment operations ............................................ (0.42) 2.92 1.87
-------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income ....................................................... (0.78) (0.79) (0.31)
Net realized gain ........................................................... -- (1.02) --
Return of capital ........................................................... -- -- (0.04)
-------- -------- --------
Total distributions ......................................................... (0.78) (1.81) (0.35)
-------- -------- --------
Common Shares offering costs charged to paid-in capital ..................... -- -- (0.04)
-------- -------- --------
Net asset value, end of period .............................................. $ 20.49 $ 21.69 $ 20.58
======== ======== ========
Market value, end of period ................................................. $ 17.45 $ 19.50 $ 19.03
======== ======== ========
TOTAL RETURN BASED ON NET ASSET VALUE (c) (d) ............................... (1.29)% 15.74% 9.74%
======== ======== ========
TOTAL RETURN BASED ON MARKET VALUE (d) (e) .................................. (6.50)% 12.53% (3.10)%
======== ======== ========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........................................ $121,015 $128,112 $121,519
Ratio of total expenses to average net assets ............................... 1.81%(f) 2.04% 2.16%(f)
Ratio of total expenses to average net assets excluding interest expense .... 1.51%(f) 1.58% 2.05%(f)
Ratio of net investment income to average net assets ........................ 5.71%(f) 4.31% 4.27%(f)
Portfolio turnover rate ..................................................... 34% 95% 40%
INDEBTEDNESS:
Loan outstanding (in 000's) ................................................. $ 12,000 $ 8,000 $ 7,000
Asset coverage per $1,000 of indebtedness (g) ............................... $ 11,085 $ 17,014 $ 18,360
----------
(a) Initial seed date of July 14, 2006. The Fund commenced operations on August
28, 2006.
(b) Net of sales load of $0.90 per Common Share on initial offering.
(c) Total return based on net asset value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan, and changes in net
asset value per share and does not reflect sales load.
(d) Total return is not annualized for periods less than one year.
(e) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan, and changes in Common
Share price.
(f) Annualized.
(g) Calculated by subtracting the Fund's total assets less the Fund's
total liabilities (not including the loan outstanding), and dividing by the
outstanding loan balance in 000's.
See Notes to Financial Statements
Page 19
NOTES TO FINANCIAL STATEMENTS
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
JUNE 30, 2008 (UNAUDITED)
1. FUND DESCRIPTION
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 average daily gross asset
value of the Fund (including assets attributable to the Fund's Preferred Shares,
if any, and the principal amount of any borrowings) minus the sum of the Fund's
accrued and unpaid dividends on any outstanding Preferred Shares and accrued
liabilities (other than the principal amount of any borrowings incurred or
commercial paper or notes issued by the Fund). There can be no assurance that
the Fund's investment objective will be achieved.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Fund's Common Shares is determined daily as
of the close of regular trading on the NYSE, normally 4:00 p.m. Eastern time, on
each day the NYSE is open for trading. Domestic debt securities and foreign
securities are priced using data reflecting the earlier closing of the principal
markets for those securities. The NAV per Common Share is calculated by dividing
the value of all assets of the Fund (including accrued dividends and interest),
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 according
to procedures adopted by the Fund's Board of Trustees. A majority of the Fund's
assets are valued using market information supplied by third parties. In
addition, structured products, including currency linked notes and credit linked
notes, as well as interest rate swaps and credit default swaps, are valued using
a pricing service or quotes provided by the selling dealer or financial
institution. In the event that market quotations are not readily available, the
pricing service does not provide a valuation for a particular asset, or the
valuations are deemed unreliable, First Trust Advisors L.P. ("First Trust") may
use a fair value method to value the Fund's securities and other investments.
Additionally, if events occur after the close of the principal markets for
particular securities (e.g., domestic debt and foreign securities), but before
the Fund values its assets, that could materially affect NAV, First Trust may
use a fair value method to value the Fund's securities and other investments.
The use of fair value pricing by the Fund is governed by valuation procedures
adopted by the Fund's Board of Trustees, and in accordance with the provisions
of the 1940 Act.
Portfolio securities listed on any exchange other than the NASDAQ National
Market ("NASDAQ") are valued at the last sale price on the business day as of
which such value is being determined. If there has been no sale on such day, the
securities are valued at the mean of the most recent bid and asked prices on
such day. Securities traded on the NASDAQ are valued at the NASDAQ Official
Closing Price as determined by NASDAQ. Portfolio securities traded on more than
one securities exchange are valued at the last sale price on the business day as
of which such value is being determined at the close of the exchange
representing the principal market for such securities. Portfolio securities
traded in the over-the-counter market, but excluding securities trading on the
NASDAQ, are valued at the closing bid prices. Fixed income securities with a
remaining maturity of 60 days or more will be valued by the Fund using a pricing
service. Short-term investments that mature in less than 60 days are valued at
amortized cost.
Page 20
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
JUNE 30, 2008 (UNAUDITED)
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 157, Fair Value Measurements
("FAS 157"), effective for fiscal years beginning after November 15, 2007. This
standard clarifies the definition of fair value for financial reporting,
establishes a framework for measuring fair value and requires additional
disclosures about the use of fair value measurements. FAS 157 became effective
for the Fund as of January 1, 2008, the beginning of its current fiscal year.
The three levels of the fair value hierarchy under FAS 157 are described below:
- Level 1 - quoted prices in active markets for identical securities
- Level 2 - other significant observable inputs (including quoted prices
for similar securities, interest rates, prepayment speeds, credit
risk, etc.)
- Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities. A summary
of the inputs used to value the Fund's net assets as of June 30, 2008 is as
follows:
INVESTMENTS OTHER FINANCIAL
VALUATION INPUTS IN SECURITIES INSTRUMENTS (a)
---------------- ------------- ---------------
Level 1 - Quoted Prices- Investments ........... $ 55,458,951 $(108,183)
Level 2 - Other Significant Observable Inputs .. 75,488,944 --
Level 3 - Significant Unobservable Inputs ...... -- --
------------ ---------
TOTAL .......................................... $130,947,895 $(108,183)
============ =========
(a) Other financial instruments are forward foreign currency contracts not
reflected in the Portfolio of Investments, which are valued at the
unrealized appreciation (depreciation) on the contracts.
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
on the accrual basis, including amortization of premiums and accretion of
discounts.
Securities purchased or sold on a when-issued or delayed-delivery basis may be
settled a month or more after the trade date; interest income on such securities
is not accrued until settlement date. The Fund maintains liquid assets with a
current value at least equal to the amount of its when-issued or
delayed-delivery purchase commitments. At June 30, 2008, the Fund had no
when-issued or delayed-delivery purchase commitments.
C. CREDIT LINKED NOTES:
The Fund invests in credit linked notes. Credit linked notes are securities that
are collateralized by one or more designated securities that are referred to as
"reference securities". Through the purchase of a credit linked note, the buyer
assumes the risk of the default or, in some cases, other declines in credit
quality of the reference securities. The buyer also takes on exposure to the
issuer of the credit linked note in the full amount of the purchase price of the
note. The issuer of a credit linked note normally will have hedged its risk on
the reference securities without acquiring any additional credit exposure. The
Fund has the right to receive periodic interest payments from the issuer of the
credit linked note at an agreed-upon interest rate, and, if there has been no
default or, if applicable, other declines in credit quality, a return of
principal at the maturity date.
Credit linked notes are subject to credit risk of the reference securities
underlying the credit linked notes. If one of the underlying reference
securities defaults, or suffers certain other declines in credit quality, the
Fund may, instead of receiving repayment of principal in whole or in part,
receive the security that has defaulted.
Credit linked notes typically are privately negotiated transactions between two
or more parties. The Fund bears the risk that the issuer of the credit linked
note will default or become bankrupt. The Fund bears the risk of loss of the
principal amount it invested, and the periodic interest payments expected to be
received for the duration of its investment in the credit linked note.
The market for credit linked notes may suddenly become illiquid. The other
parties to the transaction may be the only investors with sufficient
understanding of the derivative to be interested in bidding for it. Changes in
liquidity may result in significant, rapid and unpredictable changes in the
prices for credit linked notes. In certain cases, a market price for a credit
linked note may not be available.
Page 21
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
JUNE 30, 2008 (UNAUDITED)
D. FORWARD FOREIGN CURRENCY CONTRACTS:
Forward foreign currency contracts are agreements to exchange one currency for
another at a future date and at a specified price. The Fund may use 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 on the Statement of Assets and Liabilities.
Realized and unrealized gains and losses are included 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 up to the
entire contract amount, which may exceed the net unrealized value shown on the
Schedule of Forward Foreign Currency Contracts.
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 investment securities and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses 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. Net realized foreign
currency gains and losses include the effect of changes in exchange rates
between trade date and settlement date on investment security transactions,
foreign currency transactions and interest and dividends received. The portion
of foreign currency gains and losses related to fluctuations in exchange rates
between the initial purchase trade date and subsequent sale trade date is
included in "Net realized gain (loss) on foreign currency transactions" on the
Statement of Operations.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Level dividend distributions are declared and paid quarterly to Common
Shareholders after the payment of interest and/or dividends in connection with
leverage. The level dividend rate may be modified by the Board of Trustees from
time to time. If, for any quarterly distribution, net investment company taxable
income, if any (which term includes net short-term capital gain), is less than
the amount of the distribution, the difference will generally be a tax-free
return of capital distributed from the Fund's assets. Distributions of any net
long-term capital gains earned by the Fund are distributed at least annually.
Distributions will automatically be reinvested into additional Common Shares
pursuant to the Fund's Dividend Reinvestment Plan unless cash distributions are
elected by the shareholder.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from accounting principles generally
accepted in the United States of America. These differences are primarily due to
differing treatments of income and gains on various investment securities held
by the Fund, timing differences and differing characterization of distributions
made by the Fund. The ultimate determination of the character of distributions
will be made after the 2008 calendar year-end.
The tax character of distributions paid during the year ended December 31, 2007
was as follows:
Ordinary Income ..................................... $ 8,313,201
Long-Term Capital Gains ............................. 2,375,276
As of December 31, 2007, the components of distributable earnings on a tax basis
were as follows:
Undistributed Ordinary Income ....................... $ 258,076
Accumulated Long-Term Gains ......................... $ 493,788
Net Unrealized Appreciation (Depreciation) .......... $14,922,756
G. INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes.
In June 2006, FASB issued Interpretation No. 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes." FIN 48 establishes the minimum threshold for
recognizing, and a system for measuring, the benefits of tax-return positions in
financial statements, effective for the Fund's current fiscal year. Management
has analyzed the Fund's tax positions taken on federal income tax returns for
all open tax years (tax years ended December 31, 2004-2007) for purposes of
implementing FIN 48, and has concluded that no provision for income tax is
required in the Fund's financial statements.
Page 22
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
JUNE 30, 2008 (UNAUDITED)
H. EXPENSES:
The Fund pays all expenses directly related to its operations.
I. ACCOUNTING PRONOUNCEMENT:
In March 2008, FASB released Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("FAS
161"). FAS 161 requires qualitative disclosures about objectives and strategies
for using derivatives, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments, and disclosures about credit
risk-related contingent features in derivative agreements. The application of
FAS 161 is required for fiscal years beginning after November 15, 2008 and
interim periods within those fiscal years. Management is currently evaluating
the impact the adoption of FAS 161 will have on the Fund's financial statement
disclosures, if any.
3. INVESTMENT ADVISORY FEE AND OTHER AFFILIATED TRANSACTIONS
First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. First Trust
serves as investment advisor to the Fund pursuant to an Investment Management
Agreement. 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.
Aberdeen Asset Management Inc. (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 Managed Assets that is paid by First
Trust out of its investment advisory fee.
PNC Global Investment Servicing (U.S.) Inc., formerly known as PFPC Inc., an
indirect, majority-owned subsidiary of The PNC Financial Services Group, Inc.,
serves as the Fund's Administrator, Fund Accountant, Transfer Agent and Board
Administrator in accordance with certain fee arrangements. PFPC Trust Company,
also an indirect, majority-owned subsidiary of The PNC Financial Services Group,
Inc., serves as the Fund's Custodian in accordance with certain fee
arrangements.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid an annual retainer
of $10,000 per trust for the first 14 trusts of the First Trust Fund Complex and
an annual retainer of $7,500 per trust for each subsequent trust added to the
First Trust Fund Complex. The annual retainer is allocated equally among each of
the trusts. No additional meeting fees are paid in connection with board or
committee meetings.
Additionally, the Lead Independent Trustee is paid $10,000 annually and the
Chairman of the Audit Committee is paid $5,000 annually, with such compensation
paid by the trusts in the First Trust Fund Complex and divided among those
trusts. Trustees are also reimbursed by the trusts in the First Trust Fund
Complex for travel and out-of-pocket expenses in connection with all meetings.
Effective January 1, 2008, each of the chairmen of the Nominating and Governance
Committee and the Valuation Committee is paid $2,500 annually to serve in such
capacities, with such compensation paid by the trusts in the First Trust Fund
Complex and divided among those trusts. Also effective January 1, 2008, the Lead
Independent Trustee and each Committee chairman will serve two-year terms.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, other than U.S.
government obligations and short-term obligations, for the six months ended June
30, 2008, were $47,528,117 and $44,380,040, respectively.
As of June 30, 2008, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $15,272,380
and the aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $4,695,330.
5. COMMON SHARES
As of June 30, 2008, 5,905,236 of $0.01 par value Common Shares were issued and
outstanding. An unlimited number of Common Shares has been authorized for the
Fund's Dividend Reinvestment Plan.
6. PREFERRED SHARES OF BENEFICIAL INTEREST
The Fund's Declaration of Trust authorizes the issuance of preferred shares of
beneficial interest (the "Preferred Shares"), with rights as determined by the
Board of Trustees without the approval of Common Shareholders. As of June 30,
2008, no Preferred Shares had been issued.
Page 23
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
JUNE 30, 2008 (UNAUDITED)
7. REVOLVING LOAN AGREEMENT
The Fund has entered into a revolving loan agreement with certain lenders, which
provides for a credit facility to be used as leverage for the Fund. The credit
facility provides for a secured line of credit for the Fund where Fund assets
are pledged against advances made to the Fund. Under the requirements of the
1940 Act, the Fund, immediately after any such borrowings, must have an "asset
coverage" of at least 300% (33-1/3% of the Fund's total assets after
borrowings). The total commitment under the facility is up to $28,000,000. For
the six months ended June 30, 2008, the average amount outstanding was
$9,648,352. The high and low annual interest rates during the six months ended
June 30, 2008, were 5.68% and 3.03%, respectively, and the weighted average
interest rate was 3.68%. The interest rate at June 30, 2008 was 3.03%. The Fund
also pays a commitment fee of 0.125% per year, which is included in "Interest
and fees on loan" on the Statement of Operations. The revolving loan agreement
has been extended until November 17, 2008.
8. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
9. RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some of the risks
that should be considered for the Fund. For additional information about the
risks associated with investing in the Fund, please see the Fund's prospectus
and statement of additional information, as well as other Fund regulatory
filings.
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.
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; (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 Fund to reinvest 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.
Page 24
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
JUNE 30, 2008 (UNAUDITED)
INTEREST RATE RISK: The Fund 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. 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.
CREDIT LINKED NOTES RISK: The Fund may invest up to 35% of its managed assets in
credit linked notes. Credit linked notes are subject to credit risk of the
reference securities underlying the credit linked notes. If one of the
underlying reference securities defaults or suffers certain other declines in
credit quality, the Fund may, instead of receiving repayment of principal in
whole or in part, receive the security that has defaulted. The Fund also bears
the risk that the issuer of the credit linked note will default or become
bankrupt. The Fund bears the risk of loss of the principal amount it invested
and the periodic interest payments expected to be received for the duration of
its investment in the credit linked note.
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, or obtained through the issuance of Preferred Shares, 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 and the holders of Preferred 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 Preferred Shares or purchase
Common Shares or Preferred Shares.
Page 25
ADDITIONAL INFORMATION
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
JUNE 30, 2008 (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 PNC
Global Investment Servicing (U.S.) 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 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 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 (800) 331-1710, 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 PNC Global Investment
Servicing (U.S.) 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 securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's website located at http://www.sec.gov.
Page 26
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
JUNE 30, 2008 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available (1) by calling (800)
988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; (3)
on the SEC's website at http://www.sec.gov; and (4) for review and copying at
the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding
the operation of the PRR may be obtained by calling (800) SEC-0330.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, Energy Income and
Growth Fund, First Trust Enhanced Equity Income Fund, First Trust/Aberdeen
Global Opportunity Income Fund, First Trust/FIDAC Mortgage Income Fund, First
Trust Strategic High Income Fund, First Trust Strategic High Income Fund II,
First Trust/Aberdeen Emerging Opportunity Fund, First Trust Specialty Finance
and Financial Opportunities Fund (formerly known as First Trust/Gallatin
Specialty Finance and Financial Opportunities Fund) and First Trust Active
Dividend Income Fund and Shareholders of the Preferred Shares of First Trust
Tax-Advantaged Preferred Income Fund, was held on April 14, 2008. At the Annual
Meeting, Trustee Robert F. Keith was elected for a three-year term. The number
of votes cast in favor of Mr. Keith was 4,296,839, the number of votes against
was 113,648 and the number of abstentions was 1,494,749. James A. Bowen, Richard
E. Erikson, Thomas R. Kadlec and Neil B. Nielson are the current and continuing
Trustees.
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING CONTINUATION OF INVESTMENT
MANAGEMENT AND SUB-ADVISORY AGREEMENTS
The Board of Trustees of First Trust/Aberdeen Emerging Opportunity Fund (the
"Fund"), including the Independent Trustees, unanimously approved the
continuation of the Investment Management Agreement (the "Advisory Agreement")
between the Fund and First Trust Advisors L.P. (the "Advisor") and the
Investment Sub-Advisory Agreement (the "Sub-Advisory Agreement" and together
with the Advisory Agreement, the "Agreements") among the Fund, the Advisor and
Aberdeen Asset Management Inc. (the "Sub-Advisor"), at a meeting held on March
3, 2008. The Board determined that the terms of the Agreements are fair and
reasonable and that the Agreements continue to be in the best interests of the
Fund.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. To assist the Board in its evaluation of the Agreements, the
Independent Trustees received a separate report from each of the Advisor and the
Sub-Advisor in advance of the Board meeting responding to a request for
information from counsel to the Independent Trustees. The reports, among other
things, outlined the services provided by the Advisor and the Sub-Advisor
(including the relevant personnel responsible for these services and their
experience); the advisory and sub-advisory fees for the Fund as compared to fees
charged by investment advisors and sub-advisors to comparable funds and as
compared to fees charged to other clients of the Advisor and the Sub-Advisor;
expenses of the Fund as compared to expense ratios of comparable funds; the
nature of expenses incurred in providing services to the Fund and the potential
for economies of scale, if any; financial data on the Advisor and the
Sub-Advisor; any fall-out benefits to the Advisor and the Sub-Advisor; and
information on the Advisor's and the Sub-Advisor's compliance programs. The
Independent Trustees also met separately with their independent legal counsel to
discuss the information provided by the Advisor and the Sub-Advisor. The Board
applied its business judgment to determine whether the arrangements between the
Fund and the Advisor and among the Fund, the Advisor and the Sub-Advisor are
reasonable business arrangements from the Fund's perspective as well as from the
perspective of shareholders.
In reviewing the Agreements, the Board considered the nature, quality and extent
of services provided by the Advisor and the Sub-Advisor under the Agreements.
With respect to the Advisory Agreement, the Board considered that the Advisor is
responsible for the overall management and administration of the Fund, including
the oversight of the Sub-Advisor. The Board noted the compliance program that
had been developed by the Advisor and considered that the compliance program
includes policies and procedures for monitoring the Sub-Advisor's compliance
with the 1940 Act and the Fund's investment objective and policies. With respect
to the Sub-Advisory Agreement, the Board received a presentation from
representatives of the Sub-Advisor discussing the services that the Sub-Advisor
provides to the Fund and how the Sub-Advisor meets the Fund's investment
objective. In light of the information presented and the considerations made,
the Board concluded that the nature, quality and extent of services provided to
the Fund by the Advisor and the Sub-Advisor under the Agreements have been and
are expected to remain satisfactory and that the Sub-Advisor has managed the
Fund consistent with its investment objective and policies.
Page 27
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
JUNE 30, 2008 (UNAUDITED)
The Board considered the advisory and sub-advisory fees paid under the
Agreements. The Board reviewed data prepared by Lipper Inc. ("Lipper"), an
independent source, showing the management fees and expense ratios of the Fund
as compared to the management fees and expense ratios of one peer group selected
by Lipper and a second peer group selected by the Advisor. The Board discussed
with representatives of the Advisor the differences between the two peer groups,
noting that the Lipper peer group contained only two peer funds, and also
discussed the limitations in creating a relevant peer group for the Fund given
the Fund's unique composition of both debt and equity emerging market
securities. The Board also considered the difficulties in comparing funds with
different amounts of assets and using different types of leverage. Based on the
information provided, the Board noted that the Fund's management fees were the
highest in the Lipper peer group and at the median of the Advisor peer group and
that the Fund's expense ratio was the highest in the both the Lipper peer group
and the Advisor peer group. The Board also considered the sub-advisory fee rate
and how it related to the overall management fee structure of the Fund and noted
that the Advisor pays the Sub-Advisor out of the advisory fees it receives from
the Fund. Finally, the Board considered the advisory fees paid to the Advisor by
similar funds, and noted that the Advisor does not provide advisory services to
clients with investment objectives and policies similar to the Fund's other than
to another closed-end fund. The Board also considered information provided by
the Sub-Advisor as to the fees it charges to other clients.
The Board also considered the Fund's performance for the one year period ended
September 30, 2007, as compared to the performance of a relevant blend of
benchmark indices and to a performance group selected by Lipper. The Board
considered the difficulty in creating a relevant performance group for the Fund
given its unique strategy and asset mix. The Board noted that the Fund's
performance was the lowest in the performance group for the period, but also
noted that the performance group consisted of only two other funds. The Board
noted that the Fund underperformed its blended benchmark for the period. The
Board also considered performance data provided by the Advisor for the one-year
and since-inception periods ended December 31, 2007, and considered an analysis
prepared by the Advisor on benefits provided by the Fund's leverage. In
addition, the Board considered the market price and net asset value performance
of the Fund since inception, and compared the Fund's premium/discount to the
average and median premium/discount of the Lipper peer group, noting that the
Fund's premium/discount was generally indicative of the asset class and market
events. The Board concluded that the Fund's performance was reasonable,
particularly in light of the strong absolute performance of the Fund.
On the basis of all the information provided on the fees, expenses and
performance of the Fund, the Board concluded that the advisory and sub-advisory
fees were reasonable and appropriate in light of the nature, quality and extent
of services provided by the Advisor and Sub-Advisor under the Agreements.
The Board noted that the Advisor has continued to invest in personnel and
infrastructure and had noted that the advisory fee is not structured to pass the
benefits of any economies of scale on to the shareholders as the Fund's assets
grow. The Board concluded that the management fee reflects an appropriate level
of sharing of any economies of scale. The Board also considered the costs of the
services provided and profits realized by the Advisor from serving as investment
manager to closed-end funds for the twelve months ended December 31, 2007, as
set forth in the materials provided to the Board. The Board noted the inherent
limitations in the profitability analysis, and concluded that the Advisor's
profitability appeared to be not excessive in light of the services provided to
the Fund. In addition, the Board considered and discussed any ancillary benefits
derived by the Advisor from its relationship with the Fund and noted that the
typical fall-out benefits to the Advisor such as soft dollars are not present.
The Board concluded that any other fall-out benefits received by the Advisor or
its affiliates would appear to be attenuated.
The Board considered the Sub-Advisor's representation that because it manages
the Fund in a similar fashion to other accounts it is able to achieve economies
of scale through relationships with brokers, administrative systems and other
efficiencies and that while it expects operating costs in general to continue to
rise, it continues to expect to experience the benefits of economies of scale.
The Board considered that the sub-advisory fee rate was negotiated at arm's
length between the Advisor and the Sub-Advisor, an unaffiliated third party. The
Board also considered data provided by the Sub-Advisor as to the profitability
of the Sub-Advisory Agreement to the Sub-Advisor. The Board noted the inherent
limitations in this profitability analysis and concluded that the profitability
analysis for the Advisor was more relevant, although the profitability of the
Sub-Advisory Agreement appeared to be not excessive in light of the services
provided to the Fund. The Board noted that the Sub-Advisor does not maintain any
soft-dollar arrangements and that the Sub-Advisor indicated that it does not
receive any material fall-out benefits from its relationship to the Fund.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, determined that the terms of the
Agreements continue to be fair and reasonable and that the continuation of the
Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 28
(FIRST TRUST LOGO)
INVESTMENT ADVISOR
First Trust Advisors L.P.
1001 Warrenville Road
Lisle, IL 60532
INVESTMENT SUB-ADVISOR
Aberdeen Asset Management Inc.
1735 Market Street
Philadelphia, PA 19103
ADMINISTRATOR,
FUND ACCOUNTANT,
TRANSFER AGENT &
BOARD ADMINISTRATOR
PNC Global Investment Servicing (U.S.) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
PFPC Trust Company
8800 Tinicum Boulevard
Philadelphia, PA 19153
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
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a) Not applicable.
(b) There have been no changes, as of the date of filing, in any of the
Portfolio Managers identified in response to paragraph (a)(1) of this
item in the Registrant's most recent annual report on Form N-CSR.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers,
or persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the
"1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within
90 days of the filing date of the report that includes the disclosure
required by this paragraph, based on their evaluation of these
controls and procedures required by Rule 30a-3(b) under the 1940 Act
(17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the
Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or
240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act
(17 CFR 270.30a-3(d)) that occurred during the registrant's second
fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
By (Signature and Title)* /S/ JAMES A. BOWEN
-------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date AUGUST 20, 2008
----------------------------------------------------------------------------
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 A. BOWEN
-------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date AUGUST 20, 2008
----------------------------------------------------------------------------
By (Signature and Title)* /S/ MARK R. BRADLEY
-------------------------------------------------------
Mark R. Bradley, Treasurer, Controller, Chief
Financial Officer and Chief Accounting Officer
(principal financial officer)
Date AUGUST 20, 2008
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.