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)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
(Name and address of agent for service)
registrant's telephone number, including area code: (630) 765-8000
Date of fiscal year end: December 31
Date of reporting period: June 30, 2010
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. Section 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, 2010
FIRST TRUST/ ABERDEEN EMERGING OPPORTUNITY FUND
(ABERDEEN LOGO)
ASSET MANAGEMENT
TABLE OF CONTENTS
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
SEMI-ANNUAL REPORT
JUNE 30, 2010
Shareholder Letter ....................................................... 1
At A Glance .............................................................. 2
Portfolio Commentary ..................................................... 3
Portfolio of Investments. ................................................ 7
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 ................................................... 27
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Aberdeen Asset Management Inc. ("Aberdeen" or
the "Sub-Advisor") and their respective representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust/Aberdeen Emerging Opportunity Fund (the "Fund") to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. When evaluating the information
included in this report, you are cautioned not to place undue reliance on these
forward-looking statements, which reflect the judgment of the Advisor and/or
Sub-Advisor and their respective representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money 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, 2010
Dear Shareholders:
I am pleased to present you with the semi-annual report for your investment in
First Trust/Aberdeen Emerging Opportunity Fund (the "Fund").
First Trust Advisors L.P. ("First Trust") has always believed that staying
invested in quality products and having a long-term horizon can help investors
reach their financial goals. The past eighteen months have been challenging, but
successful investors understand that the success they have achieved is typically
because of their long-term investment perspective through all kinds of markets.
The report you hold contains detailed information about your investment; a
portfolio commentary from the Fund's management team that provides a recap of
the period; a performance analysis and a market and Fund outlook. Additionally,
you will find the Fund's financial statements for the six months this report
covers. I encourage you to read this document and discuss it with your financial
advisor.
First Trust offers a variety of products that can fit many financial plans to
help those investors who are seeking long-term financial success. You may want
to talk to your advisor about the other investments we offer that might fit your
financial plan.
At First Trust we continue to be committed to making available up-to-date
information about your investments so you and your financial advisor have
current information on your portfolio. We 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, 2010 (UNAUDITED)
FUND STATISTICS
Symbol on New York Stock Exchange FEO
Common Share Price $ 19.02
Common Share Net Asset Value ("NAV") $ 19.97
Premium (Discount) to NAV (4.76)%
Net Assets Applicable to Common Shares $106,390,430
Current Quarterly Distribution per Common Share (1) $ 0.350
Current Annualized Distribution per Common Share $ 1.400
Current Distribution Rate on Closing Common Share Price (2) 7.36%
Current Distribution Rate on NAV (2) 7.01%
COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
(PERFORMANCE GRAPH)
Common Share
Price NAV
------------ -----
06/30/2009 14.45 16.51
07/02/2009 14.44 16.47
07/10/2009 14.12 16.38
07/17/2009 14.72 17
07/24/2009 15.4 17.5
07/31/2009 15.64 17.78
08/07/2009 16.09 18.21
08/14/2009 15.95 18.06
08/21/2009 16.09 18.25
08/28/2009 15.9 18.25
09/04/2009 15.92 18.3
09/11/2009 16.58 18.81
09/18/2009 17 19.29
09/25/2009 16.86 19.01
10/02/2009 17.23 19.11
10/09/2009 18.36 19.62
10/16/2009 18.27 19.85
10/23/2009 18.42 19.82
10/30/2009 17.47 19.23
11/06/2009 17.66 19.47
11/13/2009 17.86 19.82
11/20/2009 18.09 19.84
11/27/2009 18.18 19.76
12/04/2009 18.4 19.99
12/11/2009 18.12 19.93
12/18/2009 18.22 19.78
12/24/2009 18.03 19.64
12/31/2009 18.04 19.76
01/08/2010 18.55 20.21
01/15/2010 18.28 20.1
01/22/2010 17.76 19.59
01/29/2010 17.04 19.45
02/05/2010 16.19 19.19
02/12/2010 17.15 19.43
02/19/2010 17.42 19.67
02/26/2010 17.6 19.8
03/05/2010 18.26 20.42
03/12/2010 18.6 20.72
03/19/2010 19.2 20.53
03/26/2010 19.04 20.54
04/01/2010 19.09 20.89
04/09/2010 19.29 21.09
04/16/2010 19.06 21
04/23/2010 19.6 21.1
04/30/2010 19.55 20.92
05/07/2010 17.92 19.77
05/14/2010 19.13 20.27
05/21/2010 18.13 19.64
05/28/2010 18.71 19.83
06/04/2010 18.2 19.84
06/11/2010 18.96 20.16
06/18/2010 19.73 20.64
06/25/2010 19.09 20.28
06/30/2010 19.02 19.97
PERFORMANCE
Average Annual
6 Months 1 Year Total Return
Ended Ended Inception (8/28/2006)
6/30/2010 6/30/2010 to 6/30/2010
--------- --------- ---------------------
Fund Performance (3)
NAV 4.77% 30.31% 10.90%
Market Value 9.30% 41.81% 8.20%
Index Performance
Blended Benchmark (4) 0.13% 18.38% 9.59%
Barclays Capital Global Emerging Markets Index 2.73% 17.80% 7.11%
FTSE All World Emerging Market Index -5.50% 25.14% 8.35%
% OF TOTAL
TOP 10 COUNTRIES (5) INVESTMENTS
-------------------- -----------
Brazil 12.0%
Mexico 10.9
Indonesia 7.1
Russia 6.8
China 6.6
India 4.6
Philippines 4.3
Turkey 3.9
Hungary 3.6
Venezuela 3.4
----
Total 63.2%
====
% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
--------------- -----------
Republic of Argentina, 7.00%, 10/03/15 2.7%
Samsung Electronics Co., Ltd., Preference Shares 1.9
Brazil NTN - Series F, 10.00%, 01/01/17 1.9
Ex-IM Bank of Ukraine, 7.65%, 09/07/11 1.8
Turkey Government Bond, 16.00%, 03/07/12 1.8
Majapahit Holding B.V., 7.75%, 10/17/16 1.8
Republic of Columbia, 6.13%, 01/18/41 1.6
Republic of Philippines, 7.75%, 01/14/31 1.6
Vale S.A., Preference Shares, ADR 1.5
Taiwan Mobile Co., Ltd. 1.5
----
Total 18.1%
====
% OF TOTAL
CREDIT QUALITY (6) BONDS & NOTES
------------------ -------------
AA- 1.4%
A 4.6
A- 3.0
BBB+ 2.2
BBB 16.6
BBB- 7.4
BB+ 10.7
BB 10.8
BB- 14.5
B+ 11.7
B 9.5
B- 5.3
C 0.9
D 0.3
NR 1.1
-----
Total 100.0%
=====
% OF TOTAL
INDUSTRY CLASSIFICATION INVESTMENTS
----------------------- -----------
Government Bonds and Notes 32.3%
Commercial Banks 11.4
Oil, Gas & Consumable Fuels 8.6
Real Estate Management & Development 4.6
Wireless Telecommunications 4.3
Diversified Financial Services 3.9
Electric Utilities 3.1
Semiconductors & Semiconductor Equipment 3.0
Construction Materials 2.9
Food Retailing & Staples 2.5
Metals & Mining 2.5
Automobiles 2.4
Specialty Retail 2.1
Pharmaceuticals 1.9
Import/Export Bank 1.8
Multiline 1.8
Beverages 1.7
Tobacco 1.7
Household Durables 1.4
Household Products 1.1
Transportation Infrastructure 1.1
Other 3.9
-----
Total 100.0%
=====
(1) Most recent distribution paid or declared through 6/30/2010. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 6/30/2010. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by the
Dividend Reinvestment Plan and changes in NAV per share for net asset value
returns and changes in Common Share price for market value returns. Total
returns do not reflect sales load and are not annualized for periods less
than one year. Past performance is not indicative of future results.
(4) Blended benchmark consists of the following: JPMorgan Emerging Markets Bond
Index - Global Diversified (32.5%); JPMorgan Government Bond Index
-Emerging Markets (32.5%); MSCI Global Emerging Markets Index (35.0%).
(5) Fixed-income portfolio securities are included in a country based upon
their underlying credit exposure as determined by Aberdeen Asset Management
Inc., the investment sub-advisor.
(6) 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 more than one
NRSRO 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 Group"). Aberdeen Group
is a publicly-traded international investment management group listed on the
London Stock Exchange, managing assets for both institutional and retail clients
from offices around the world.
PORTFOLIO MANAGEMENT TEAM
Investment decisions for the First Trust/Aberdeen Emerging Opportunity Fund (the
"Fund") are made by Aberdeen using a team approach and not by any one
individual. By making team decisions, Aberdeen seeks to ensure that the
investment process results in consistent returns across all portfolios with
similar objectives. Aberdeen does not employ separate research analysts.
Instead, Aberdeen's investment managers combine 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, Scotland, 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.
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. 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
team. 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 Market Debt 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 Management, 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.
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 Market Debt investment committee at Aberdeen and is also
responsible for the daily implementation of the investment process.
ESTHER CHAN
PORTFOLIO MANAGER, EMERGING MARKET DEBT
Ms. Chan joined Aberdeen in Singapore in 2005 where she started as a corporate
credit analyst and trader working across investment-grade and high-yield assets
in the region. She has 6 years of experience in the asset class, and now serves
as a portfolio manager in Aberdeen London with specialization in analysis,
management and trading of external Asian debt, and Emerging Market corporates.
Prior to joining Aberdeen, Ms. Chan worked as a corporate finance analyst at
John Moore, assisting in various deals focused on the debt restructuring in
Indonesian firms facing creditor holdout situations, post Asian crisis.
COMMENTARY
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
The investment objective of the Fund is to provide a high level of total return.
The Fund pursues its investment objective by investing at least 80% of its
managed assets in a diversified portfolio of equity and fixed-income securities
of issuers in emerging market countries. There can be no assurance that the
Fund's investment objective will be achieved, and the Fund may not be
appropriate for all investors.
MARKET RECAP - EQUITY
Emerging markets were volatile during the six months covered by this report.
Buoyant economic data and firmer crude oil prices lifted sentiment in the first
three months, but confidence was later dented by persistent concerns that policy
tightening in China and Europe's worsening debt problems might stifle the global
economic recovery. Towards the end of the reporting period, manufacturing output
and GDP growth moderated.
Page 4
PORTFOLIO COMMENTARY - (CONTINUED)
MARKET RECAP - FIXED-INCOME
The first half of 2010 can easily be distinguished between two periods of market
strength and one period of weakness. Investors continued to remain bullish at
the start of the year, adding exposure to emerging fixed-income securities,
moving the JPM EMBI Global Diversified Index from 486 at the start of the year
to a high of 512 in April. At the same time, U.S. Treasuries went to 4% from
3.84% at the start of 2010. Towards the end of April, concerns started to build
about the ability of some European countries' capability to service their debt,
namely Greece, Portugal, Spain and Ireland. Intervention by other more stable
European countries such as Germany and France and the European Central Bank
("ECB") eventually helped to diffuse the market's concern, but not until the
Treasury yield declined to 3% and investors reduced their holdings in emerging
market debt. So although the Index ended up by the end of June at 512 from its
low of 496, the spread over U.S. Treasuries continued to widen to 355 as U.S.
Treasuries continued to rally to below 3% as the growth outlook faltered and
inflation concerns abated. Markets began to price out the chance of the Federal
Reserve starting to increase interest rates as the chance of a double-dip
recession started to gather greater momentum. Towards the end of the first half
of 2010, investors began adding to their emerging market debt exposure as yields
and spreads over U.S. Treasuries became more attractive again, causing the Index
to increase in value.
FUND RECAP
The Fund had a net asset value ("NAV") total return(1) of 4.77% and a market
value total return(1) of 9.30% for the six months ended June 30, 2010, compared
to the Fund's blended benchmark(2) total return of 0.13% over the same period.
In addition to this blended benchmark, the Fund currently uses other indexes for
comparative purposes. The total returns for the six months ended June 30, 2010,
for these indexes were as follows: the Barclays Capital Global Emerging Markets
Index was 2.73% and the FTSE All World Emerging Market Index was -5.50%.
PERFORMANCE ANALYSIS - EQUITY
Against this backdrop, our focus on quality companies with strong balance sheets
helped the Fund to outperform its blended benchmark. Our overweight to
businesses with a domestic focus and the underweight to cyclical sectors added
to performance given the concerns over global growth. The non-benchmark exposure
in Hong Kong also benefited the Fund, as did the overweight to Thailand, which
outpaced most of its peers, despite the recent domestic political unrest.
Stock selection was the main contributor to outperformance and was significant
in Brazil, South Africa, Turkey, China, Indonesia and Taiwan. Some of the
laggards in 2009, such as GSK India and South African retailer Massmart,
rebounded. Elsewhere, Indonesian conglomerate Astra International, Thai
conglomerate Siam Cement and Indian bike manufacturer Hero Honda maintained
their strong momentum from 2009 on the back of robust earnings. Taiwan Mobile
and Turkish food retailer BIM also gained from solid quarterly results. In
Brazil, retailer Lojas Renner was buoyed by resilient retail sales and increased
consumer confidence, while Souza Cruz's defensive characteristics stood out. In
Mexico, Kimberly-Clark de Mexico gained on the back of higher relative
consumption following the swine flu outbreak last year and lower input costs.
Conversely, the Fund's positions in drug maker Gedeon Richter, seamless pipe
maker Tenaris and Brazilian bank Bradesco detracted from performance. Poor
sentiment in Hungary weighed on Richter, while fears over slowing global growth
and the oil spill in the Gulf of Mexico hurt Tenaris. In Brazil, the banking
sector as a whole underperformed on concerns over increasing reserve
requirements and interest rates.
The equity portion of the Fund rose by 2.83% in U.S. dollar terms over the
period covered by this report, compared with a fall in the benchmark, the MSCI
Global Emerging Markets Index, of -6.12%.
PERFORMANCE ANALYSIS - FIXED-INCOME
The emerging market debt component of the Fund outperformed the debt
component(3) of the blended benchmark of both hard currency and local bonds and
outperformed the individual components. The Fund's overweight position in hard
currency bonds and underweight position in local currency bonds contributed
positively to the outperformance. The U.S. dollar-denominated currency bonds
index (JPM EMBI Global Diversified) had a much higher return than the local
currency bond index (JPM GBI): 5.59% compared to 1.39% as the U.S. dollar was
one of the top-performing currencies over the period.
----------
(1) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by the
Dividend Reinvestment Plan, and changes in net asset value per share for
net asset value returns and changes in Common Share price for market value
returns. Total returns do not reflect sales load. Past performance is not
indicative of future results.
(2) 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.
(3) The benchmark for the fixed-income portion of the Fund consists of the
following: 50% JPMorgan Emerging Markets Bond Index-Global Diversified (JPM
EMBI Global) and 50% JPMorgan Government Bond Index-Emerging Markets (JPM
GBI-EM).
Page 5
PORTFOLIO COMMENTARY - (CONTINUED)
The Fund's overweight position in the higher beta credits, such as Ukraine,
Argentina and Venezuela, helped the Fund to outperform. In the case of Argentina
and Venezuela, although these credits underperformed in the Index, the Fund's
short duration positions compared to the benchmark were favorable to the Fund's
performance. In other words, security selections created the outperformance for
the Fund's portfolio. The Fund also remained overweight in corporate bonds,
which outperformed many of the sovereign bonds. This was due to higher yields
and therefore greater demand for these assets. The Fund's underweight in higher
quality Latin American countries (such as Peru and Panama) was a mild detractor
from performance.
The local currency component of the Fund outperformed its respective Index
predominately due to the Fund's underweight holdings in the Eastern Europe
countries (such as Hungary and Poland) which both did incredibly poorly due to
investors' concerns over the weaker European countries. The Fund lost
performance due to its underweight positions in Malaysia and Thailand which were
both strong performers for the first half of 2010, due to the decrease in U.S.
Treasury yields and the rallying U.S. dollar.
MARKET AND FUND OUTLOOK - EQUITY
In the West, deteriorating leading indicators have intensified fears of a
double-dip recession, splitting opinion on whether or not stimulus should be
maintained. While some favor extending stimulus, Europe's burgeoning debt
problems have increased the call for fiscal discipline and austerity. However,
this comes at a time when final private demand is still anemic and risks
derailing the global recovery. At the same time, rising inflation poses an
opposing problem, namely, the risk of overheating in many emerging economies.
Taken together, we believe these imbalances are likely to cause volatility to
remain high across asset classes. However, we are focused on long-term company
prospects. Within emerging markets, we see plenty of companies with robust
finances and sound businesses, which are supported by demand from a fast-growing
middle class. We are, therefore, looking past short-term market pressures for
buying opportunities.
MARKET AND FUND OUTLOOK - FIXED-INCOME
As concerns shift from Greece and the Eurozone to the slowing growth data in the
U.S. and China, we would expect emerging market debt to remain choppy over the
short-term. At the same time, we would expect emerging market debt to be a
relative outperformer, reflecting the supportive macro outlook and more
favourable debt and fiscal outlook compared to the developed world. In this
respect, external debt will likely continue to attract investors as a result of
extremely low G3 yields. (The G3 is a free trade agreement originally between
Colombia, Mexico and Venezuela that has been in effect since January 1995. Since
that date, Venezuela has withdrawn from this trade bloc).
Page 6
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS (A) (B)
JUNE 30, 2010 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
--------------- ----------- ------ -------- ------------
BONDS AND NOTES (C) - 60.5%
ARGENTINA - 3.3%
1,332,820 Republic of Argentina (ARS) (d)..................... 5.13% 02/04/18 $ 533,811
3,830,000 Republic of Argentina (USD)......................... 7.00% 10/03/15 3,012,957
------------
3,546,768
------------
BRAZIL - 4.6%
4,070,000 Brazil Notas do Tesouro Nacional Series F (BRL)..... 10.00% 01/01/17 2,037,900
1,610,000 Brazil Notas do Tesouro Nacional Series F (BRL)..... 10.00% 01/01/21 767,314
144,000 Dasa Finance Corp. (USD)............................ 8.75% 05/29/18 156,600
280,000 Fibria Overseas Finance Ltd. (USD).................. 7.50% 05/04/20 285,600
200,000 Petrobras International Finance Co. (USD)........... 7.88% 03/15/19 229,200
630,000 Pontis Ltd. (USD)................................... 6.25% 07/20/10 628,743
630,000 Rearden G Holdings Eins GmbH (USD).................. 7.88% 03/30/20 639,167
------------
4,744,524
------------
CHINA - 2.0%
470,000 Agile Property Holdings Ltd. (USD).................. 10.00% 11/14/16 482,925
370,000 Agile Property Holdings Ltd. (USD).................. 8.88% 04/28/17 345,950
620,000 CFG Investment S.A.C. (USD)......................... 9.25% 12/19/13 641,700
710,000 Yanlord Land Group Ltd. (USD)....................... 9.50% 05/04/17 672,725
------------
2,143,300
------------
COLOMBIA - 2.6%
260,000 Republic of Colombia (USD).......................... 7.38% 09/18/37 306,800
1,735,000 Republic of Colombia (USD).......................... 6.13% 01/18/41 1,755,300
600,000 TGI International Ltd. (USD)........................ 9.50% 10/03/17 669,000
------------
2,731,100
------------
DOMINICAN REPUBLIC - 2.0%
505,000 Cerveceria Nacional Dominica (USD) (d).............. 16.00% 03/27/12 493,789
990,000 Dominican Republic (USD)............................ 7.50% 05/06/21 1,024,650
528,000 Dominican Republic (USD)............................ 8.63% 04/20/27 576,840
------------
2,095,279
------------
EL SALVADOR - 1.1%
1,070,000 Republic of El Salvador (USD)....................... 7.65% 06/15/35 1,139,550
------------
HUNGARY - 2.6%
227,370,000 Hungary Government Bond (HUF)....................... 6.00% 10/24/12 958,224
87,000,000 Hungary Government Bond (HUF)....................... 5.50% 02/12/16 339,215
384,000,000 Hungary Government Bond (HUF)....................... 6.50% 06/24/19 1,517,338
------------
2,814,777
------------
INDONESIA - 6.1%
540,000 Berau Capital Resources (USD)....................... 12.50% 07/08/15 540,000
340,000 Indo Integrated Energy II B.V. (USD)................ 9.75% 11/05/16 355,623
11,230,000,000 Indonesian Government Bond (IDR).................... 10.75% 05/15/16 1,410,468
1,850,000,000 Indonesian Recapitalization Bond (IDR).............. 13.40% 02/15/11 213,451
4,350,000,000 Indonesian Recapitalization Bond (IDR).............. 13.45% 08/15/11 517,910
See Notes to Financial Statements
Page 7
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS (A) (B) - (CONTINUED)
JUNE 30, 2010 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
--------------- ----------- ------ -------- ------------
BONDS AND NOTES (C) - (CONTINUED)
INDONESIA - (CONTINUED)
1,760,000 Majapahit Holding B.V. (USD)......................... 7.75% 10/17/16 $ 1,953,992
150,000 Majapahit Holding B.V. (USD)......................... 7.25% 06/28/17 160,811
620,000 MGTI Finance Company, Ltd. (USD)..................... 8.38% 09/15/10 624,867
650,000 Star Energy Geothermal (Wayang Windu) Ltd. (USD)..... 11.50% 02/12/15 676,000
------------
6,453,122
------------
KAZAKHSTAN - 2.2%
420,000 Halyk Savings Bank of Kazakhstan (USD)............... 9.25% 10/16/13 439,068
410,000 KazakhGold Group Ltd. (USD).......................... 9.38% 11/06/13 422,115
710,000 KazMunaiGaz Finance Sub B.V. (USD)................... 7.00% 05/05/20 716,248
430,000 Turanalem Finance B.V. (USD) (e)..................... 7.88% 06/02/10 199,434
350,000 Turanalem Finance B.V. (USD) (e)..................... 7.75% 04/25/13 162,750
910,000 Turanalem Finance B.V. (USD) (e)..................... 8.25% 01/22/37 436,800
------------
2,376,415
------------
LITHUANIA - 1.1%
1,140,000 Republic of Lithuania (USD).......................... 7.38% 02/11/20 1,199,850
------------
MALAYSIA - 0.8%
700,000 Petronas Capital Ltd. (USD).......................... 7.88% 05/22/22 873,764
------------
MEXICO - 7.5%
750,000 Axtel S.A.B. de C.V. (USD)........................... 9.00% 09/22/19 671,250
680,000 BBVA Bancomer S.A./ Texas (USD)...................... 7.25% 04/22/20 672,578
525,000 Corp. Geo S.A. de C.V. (USD)......................... 8.88% 09/25/14 548,625
320,000 Corp. Geo S.A. de C.V. (USD)......................... 9.25% 06/30/20 320,608
550,000 Corporativo Javer S.A. de C.V. (USD)................. 13.00% 08/04/14 610,500
660,000 Desarrolladora Homex S.A. (USD)...................... 9.50% 12/11/19 679,800
450,000 Grupo Posadas S.A.B. de C.V. (USD)................... 9.25% 01/15/15 456,750
5,100,000 Mexican Bonos Desarr Fixed Rate Bond (MXN)........... 7.25% 12/15/16 409,205
11,950,000 Mexican Bonos Desarr Fixed Rate Bond (MXN)........... 8.00% 06/11/20 1,002,251
5,440,000 Mexican Bonos Desarr Fixed Rate Bond (MXN)........... 10.00% 11/20/36 533,777
9,350,000 Mexico Cetes (MXN)................................... (f) 09/09/10 716,447
380,000 Pemex Project Funding Master Trust (USD)............. 6.63% 06/15/35 392,752
910,000 Pemex Project Funding Master Trust (USD)............. 6.63% 06/15/38 932,989
------------
7,947,532
------------
NIGERIA - 0.8%
790,000 GTB Finance B.V. (USD)............................... 8.50% 01/29/12 806,669
------------
PAKISTAN - 0.3%
150,000 Islamic Republic of Pakistan (USD)................... 6.88% 06/01/17 136,320
290,000 Islamic Republic of Pakistan (USD)................... 7.88% 03/31/36 223,105
------------
359,425
------------
PERU - 0.9%
2,440,000 Peru Bono Soberano (PEN)............................. 8.20% 08/12/26 989,472
------------
See Notes to Financial Statements
Page 8
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS (A) (B) - (CONTINUED)
JUNE 30, 2010 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
--------------- ----------- ------ -------- ------------
BONDS AND NOTES (C) - (CONTINUED)
PHILIPPINES - 3.4%
160,000 Republic of Philippines (USD)........................ 10.63% 03/16/25 $ 231,922
1,470,000 Republic of Philippines (USD)........................ 7.75% 01/14/31 1,710,786
880,000 Republic of Philippines (USD)........................ 6.38% 10/23/34 890,420
740,000 SM Investments Corp. (USD)........................... 6.00% 09/22/14 767,205
------------
3,600,333
------------
QATAR - 0.8%
840,000 State of Qatar (USD)................................. 5.25% 01/20/20 882,000
------------
RUSSIA - 5.9%
639,000 Evraz Group S.A. (USD)............................... 8.25% 11/10/15 636,604
600,000 Gaz Capital S.A. (USD)............................... 9.25% 04/23/19 693,000
630,000 LUKOIL International Finance B.V. (USD).............. 7.25% 11/05/19 650,475
17,128,436 Red Arrow International Leasing PLC (RUB)............ 8.38% 06/30/12 564,886
39,300,000 RSHB Capital S.A. (RUB).............................. 7.50% 03/25/13 1,249,275
423,200 Russia Government International Bond (USD)........... 7.50% 03/31/30 478,131
700,000 Russian Railways (USD)............................... 5.74% 04/03/17 691,250
670,000 TNK-BP Finance S.A. (USD)............................ 7.50% 07/18/16 699,312
600,000 VIP Finance Ireland Ltd. for OJSC Vimpel
Communications (USD)................................. 9.13% 04/30/18 652,500
------------
6,315,433
------------
SOUTH AFRICA - 1.3%
9,200,000 Republic of South Africa (ZAR)....................... 10.50% 12/21/26 1,346,101
------------
TURKEY - 1.9%
2,800,000 Turkey Government Bond (TRY)......................... 16.00% 03/07/12 1,967,348
------------
UKRAINE - 2.1%
170,000 Biz Finance PLC For UKreximbank (USD)................ 8.38% 04/27/15 167,025
2,040,000 EX-IM Bank of Ukraine (USD).......................... 7.65% 09/07/11 2,029,800
80,000 Ukraine Government Bond (USD)........................ 6.58% 11/21/16 74,904
------------
2,271,729
------------
UNITED ARAB EMIRATES - 0.6%
400,000 Atlantic Finance Ltd. (USD).......................... 9.75% 05/27/14 422,600
650,000 Dubai Electricity & Water Authority (USD)............ 8.50% 04/22/15 662,858
------------
1,085,458
------------
URUGUAY - 2.7%
110,000 Republic of Uruguay (USD)............................ 7.88% 01/15/33 130,900
1,140,000 Republic Orient Uruguay (USD)........................ 7.63% 03/21/36 1,328,100
20,320,000 Republic Orient Uruguay,
Inflation Adjusted Bond (UYU) (g).................... 5.00% 09/14/18 1,384,342
------------
2,843,342
------------
See Notes to Financial Statements
Page 9
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS (A) (B) - (CONTINUED)
JUNE 30, 2010 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
--------------- ----------- ------ -------- ------------
BONDS AND NOTES (C) - (CONTINUED)
VENEZUELA - 3.6%
1,720,000 Bolivarian Republic of Venezuela (USD)............... 7.75% 10/13/19 $ 1,036,300
1,750,000 Republic of Venezuela (USD).......................... 8.50% 10/08/14 1,351,875
2,230,000 Republic of Venezuela (USD).......................... 5.75% 02/26/16 1,404,900
------------
3,793,075
------------
TOTAL BONDS AND NOTES
(Cost $62,609,297)...................................................... 64,326,366
------------
SHARES DESCRIPTION VALUE
--------------- ----------- ------------
COMMON STOCKS - 43.0%
BRAZIL - 8.0%
86,295 Banco Bradesco S.A., ADR................................................ 1,368,639
43,000 Lojas Renner S.A........................................................ 1,177,080
31,000 Multiplan Empreendimentos Imobiliarios S.A.............................. 552,161
47,000 Petroleo Brasileiro S.A., ADR........................................... 1,400,600
25,300 Souza Cruz S.A.......................................................... 953,130
28,000 Ultrapar Participacoes S.A., Preference Shares.......................... 1,335,623
80,000 Vale S.A., Preference Shares, ADR....................................... 1,681,600
------------
8,468,833
------------
CHILE - 1.0%
15,600 Banco Santander Chile S.A., ADR......................................... 1,046,604
------------
CHINA - 4.8%
155,000 China Mobile Ltd. (h)................................................... 1,540,369
200,000 Hang Lung Group Ltd. (h)................................................ 1,077,835
920,000 PetroChina Co., Ltd., H Shares (h)...................................... 1,017,581
700,000 Swire Pacific Ltd., B Shares (h)........................................ 1,486,728
------------
5,122,513
------------
HUNGARY - 1.0%
6,300 Richter Gedeon Nyrt (h)................................................. 1,113,840
------------
INDIA - 4.8%
32,000 Bharti Airtel Ltd. (h).................................................. 180,161
20,000 GlaxoSmithKline Pharmaceuticals Ltd. (h)................................ 936,699
13,000 Grasim Industries Ltd. (h).............................................. 511,917
29,000 Hero Honda Motors Ltd. (h).............................................. 1,272,165
59,000 Hindustan Unilever Ltd. (h)............................................. 339,183
11,500 Housing Development Finance Corp., Ltd. (h)............................. 724,728
20,000 ICICI Bank Ltd. (h)..................................................... 365,787
10,000 Infosys Technologies Ltd. (h)........................................... 596,632
13,000 Samruddhi Cement Ltd. (i)............................................... 136,466
------------
5,063,738
------------
INDONESIA - 1.3%
258,000 PT Astra International Tbk (h).......................................... 1,363,140
------------
See Notes to Financial Statements
Page 10
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS (A) (B) - (CONTINUED)
JUNE 30, 2010 (UNAUDITED)
SHARES DESCRIPTION VALUE
--------------- ----------- ------------
COMMON STOCKS - (CONTINUED)
ITALY - 0.8%
23,600 Tenaris S.A., ADR....................................................... $ 816,796
------------
MALAYSIA - 1.9%
70,300 British American Tobacco Malaysia Berhad (h)............................ 950,579
289,000 Public Bank Berhad (h).................................................. 1,064,420
------------
2,014,999
------------
MEXICO - 3.8%
31,900 Fomento Economico Mexicano, S.A.B. de C.V., ADR......................... 1,376,485
40,000 Grupo Aeroportuario del Centro Norte, S.A.B. de C.V., ADR............... 506,000
352,000 Grupo Financiero Banorte, S.A.B. de C.V., O Shares...................... 1,333,637
152,000 Kimberly-Clark de Mexico, S.A.B. de C.V., A Shares...................... 882,755
------------
4,098,877
------------
PHILIPPINES - 1.1%
1,164,000 Bank of the Philippine Islands (h)...................................... 1,130,288
------------
POLAND - 0.6%
13,000 Bank Pekao S.A. (h)..................................................... 592,856
------------
RUSSIA - 1.1%
23,500 LUKOIL, ADR............................................................. 1,210,250
------------
SOUTH AFRICA - 2.3%
95,000 Massmart Holdings Ltd. (h).............................................. 1,456,020
142,729 Truworths International Ltd. (h)........................................ 993,444
------------
2,449,464
------------
SOUTH KOREA - 2.5%
27,008 Busan Bank (h).......................................................... 243,345
4,900 Samsung Electronics Co., Ltd., Preference Shares (h).................... 2,088,851
850 Shinsegae Co., Ltd. (h)................................................. 367,263
------------
2,699,459
------------
TAIWAN - 2.7%
800,450 Taiwan Mobile Co., Ltd. (h)............................................. 1,630,930
643,953 Taiwan Semiconductor Manufacturing Co., Ltd. (h)........................ 1,203,576
------------
2,834,506
------------
THAILAND - 2.2%
250,000 PTT Exploration and Production Public Co., Ltd. (h)..................... 1,095,630
147,000 Siam Cement Public (The) Co., Ltd. (h).................................. 1,261,129
------------
2,356,759
------------
TURKEY - 2.1%
73,635 Akbank TAS (h).......................................................... 352,705
253,000 Aksigorta AS (h)........................................................ 291,918
33,220 Bim Birlesik Magazalar AS (h)........................................... 920,712
181,150 Haci Omer Sabanci Holding AS (h)........................................ 727,079
------------
2,292,414
------------
See Notes to Financial Statements
Page 11
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS (A) (B) - (CONTINUED)
JUNE 30, 2010 (UNAUDITED)
SHARES DESCRIPTION VALUE
--------------- ----------- ------------
COMMON STOCKS - (CONTINUED)
UNITED KINGDOM - 1.0%
45,696 Standard Chartered PLC (h).............................................. $ 1,112,715
------------
TOTAL COMMON STOCKS
(Cost $34,893,023)................................................... 45,788,051
------------
TOTAL INVESTMENTS - 103.5%
(Cost $97,502,320) (j)............................................... 110,114,417
OUTSTANDING LOAN - (5.5)%............................................... (5,800,000)
NET OTHER ASSETS AND LIABILITIES - 2.0%................................. 2,076,013
------------
NET ASSETS - 100.0%..................................................... $106,390,430
============
----------
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) All of these securities are available to serve as collateral for the
outstanding loan.
(c) 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.
(d) Variable rate security. The interest rate shown reflects the rate in effect
at June 30, 2010.
(e) This issuer is in default and interest is not being accrued by the fund nor
paid by the issuer.
(f) Zero coupon bond.
(g) Security whose principal value is adjusted in accordance with changes to
the country's Consumer Price Index. Interest is calculated on the basis of
the current adjusted principal value.
(h) Security is fair valued in accordance with procedures adopted by the Fund's
Board of Trustees.
(i) Non-income producing security.
(j) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of June 30, 2010, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $15,427,743 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $2,815,646.
ADR American Depositary Receipt
Currency Abbreviations
ARS Argentine Peso
BRL Brazilian Real
HUF Hungarian Forint
IDR Indonesian Rupiah
MXN Mexican Peso
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 12
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
JUNE 30, 2010 (UNAUDITED)
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of June 30, 2010
is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
6/30/2010 PRICES INPUTS INPUTS
------------ ----------- ----------- ------------
Bonds and Notes * ...................... $ 64,326,366 $ -- $64,326,366 $--
------------ ----------- ----------- ---
Common Stocks:
Brazil .............................. 8,468,833 8,468,833 -- --
Chile ............................... 1,046,604 1,046,604 -- --
China ............................... 5,122,513 -- 5,122,513 --
Hungary ............................. 1,113,840 -- 1,113,840 --
India ............................... 5,063,738 136,466 4,927,272 --
Indonesia ........................... 1,363,140 -- 1,363,140 --
Italy ............................... 816,796 816,796 -- --
Malaysia ............................ 2,014,999 -- 2,014,999 --
Mexico .............................. 4,098,877 4,098,877 -- --
Philippines ......................... 1,130,288 -- 1,130,288 --
Poland .............................. 592,856 -- 592,856 --
Russia .............................. 1,210,250 1,210,250 -- --
South Africa ........................ 2,449,464 -- 2,449,464 --
South Korea ......................... 2,699,459 -- 2,699,459 --
Taiwan .............................. 2,834,506 -- 2,834,506 --
Thailand ............................ 2,356,759 -- 2,356,759 --
Turkey .............................. 2,292,414 -- 2,292,414 --
United Kingdom ...................... 1,112,715 -- 1,112,715 --
------------ ----------- ----------- ---
Total Common Stocks .................... 45,788,051 15,777,826 30,010,225 --
------------ ----------- ----------- ---
Total Investments ...................... 110,114,417 15,777,826 94,336,591 --
------------ ----------- ----------- ---
Other Financial Instruments:
Forward Foreign Currency Contracts ** .. 146,853 146,853 -- --
------------ ----------- ----------- ---
$110,261,270 $15,924,679 $94,336,591 $--
============ =========== =========== ===
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
6/30/2010 PRICES INPUTS INPUTS
------------ ----------- ----------- ------------
Forward Foreign Currency Contracts ** .. $ (45,726) $ (45,726) $ -- $--
============ =========== =========== ===
* See the Portfolio of Investments for country breakout.
** See the Schedule of Forward Foreign Currency Contracts for contract and
currency detail.
See Notes to Financial Statements
Page 13
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
JUNE 30, 2010 (UNAUDITED)
FORWARD FOREIGN CURRENCY CONTRACTS TO SELL
CONTRACTS TO DELIVER
--------------------------------------------------- NET NET
LOCAL UNREALIZED UNREALIZED
CURRENCY IN APPRECIATION DEPRECIATION
SETTLEMENT COUNTER- LOCAL VALUE IN EXCHANGE OF CONTRACTS OF CONTRACTS
DATE PARTY CURRENCY (a) U.S. $ FOR U.S. $ U.S. $ U.S. $
---------- -------- -------------- ---------- ---------- ------------ ------------
09/03/10 JPM BRL 3,834,000 $2,092,709 $2,046,983 $ -- $(45,726)
07/23/10 JPM HUF130,982,000 559,612 600,526 40,914 --
07/23/10 SSB HUF117,495,000 501,989 589,154 87,165 --
07/23/10 JPM MXN 4,880,000 376,435 395,209 18,774 --
-------- --------
$146,853 $(45,726)
-------- --------
Unrealized Appreciation (Depreciation) ......................... $146,853 $(45,726)
======== ========
Net Unrealized Appreciation (Depreciation) ..................... $101,127
========
(a) Please see page 12 for currency descriptions.
Counterparty Abbreviations:
JPM JPMorgan Chase
SSB State Street Bank
See Notes to Financial Statements
Page 14
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2010 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $97,502,320) ........................................... $110,114,417
Cash ............................................................ 845,745
Foreign currency (Cost $62,605) ................................. 61,431
Unrealized appreciation on forward foreign currency contracts ... 146,853
Prepaid expenses ................................................ 23,207
Receivables:
Interest ..................................................... 1,304,862
Investment securities sold ................................... 477,618
Dividends .................................................... 127,180
------------
Total Assets .............................................. 113,101,313
------------
LIABILITIES:
Outstanding loan ................................................ 5,800,000
Unrealized depreciation on forward foreign currency contracts ... 45,726
Payables:
Investment securities purchased .............................. 540,000
Investment advisory fees ..................................... 93,085
Audit and tax fees ........................................... 32,145
Interest and fees on loan .................................... 23,361
Printing fees ................................................ 19,433
Custodian fees ............................................... 18,745
Administrative fees .......................................... 8,843
Legal fees ................................................... 8,676
Transfer agent fees .......................................... 5,645
Other liabilities ............................................... 115,224
------------
Total Liabilities ......................................... 6,710,883
------------
NET ASSETS ...................................................... $106,390,430
============
NET ASSETS CONSISTS OF:
Paid-in capital ................................................. $ 97,758,640
Par value ....................................................... 53,278
Accumulated net investment income (loss) ........................ (2,051,949)
Accumulated net realized gain (loss) on investments,
forward foreign currency contracts and foreign currency
transactions ................................................. (2,072,933)
Net unrealized appreciation (depreciation) on investments,
forward foreign currency contracts and foreign currency
translation .................................................. 12,703,394
------------
NET ASSETS ...................................................... $106,390,430
============
NET ASSET VALUE, per Common Share (par value $0.01 per
Common Share) ................................................ $ 19.97
============
Number of Common Shares outstanding (unlimited number of
Common Shares has been authorized) ........................... 5,327,785
============
See Notes to Financial Statements
Page 15
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 (UNAUDITED)
INVESTMENT INCOME:
Interest (net of foreign withholding tax of $31,563) ............. $ 2,819,770
Dividends (net of foreign withholding tax of $32,121) ............ 719,172
-----------
Total investment income .................................... 3,538,942
-----------
EXPENSES:
Investment advisory fees ......................................... 564,180
Interest and fees on loan ........................................ 87,260
Custodian fees ................................................... 85,616
Administrative fees .............................................. 53,894
Printing fees .................................................... 31,995
Audit and tax fees ............................................... 26,945
Trustees' fees and expenses ...................................... 19,520
Legal fees ....................................................... 18,203
Transfer agent fees .............................................. 15,961
Other ............................................................ 41,895
-----------
Total expenses ............................................. 945,469
-----------
NET INVESTMENT INCOME (LOSS) ..................................... 2,593,473
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments ................................................... 4,081,313
Forward foreign currency contracts ............................ 57,487
Foreign currency transactions ................................. (563,653)
-----------
Net realized gain (loss) ......................................... 3,575,147
-----------
Net change in unrealized appreciation (depreciation) on:
Investments (a) ............................................... (1,566,630)
Forward foreign currency contracts ............................ 103,596
Foreign currency translation .................................. (14,635)
-----------
Net change in unrealized appreciation (depreciation) ............. (1,477,669)
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) .......................... 2,097,478
-----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .. $ 4,690,951
===========
----------
(a) Change in unrealized appreciation (depreciation) on investments is net of
decrease in deferred foreign capital gains tax of $28,431.
See Notes to Financial Statements
Page 16
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
6/30/2010 ENDED
(UNAUDITED) 12/31/2009
------------ ------------
OPERATIONS:
Net investment income (loss) ....................................... $ 2,593,473 $ 5,705,438
Net realized gain (loss) ........................................... 3,575,147 (3,955,631)
Net change in unrealized appreciation (depreciation) ............... (1,477,669) 44,835,224
------------ ------------
Net increase (decrease) in net assets resulting from operations .... 4,690,951 46,585,031
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income .............................................. (3,729,450) (4,606,552)
Return of capital .................................................. -- (3,534,075)
------------ ------------
Total distributions to shareholders ................................ (3,729,450) (8,140,627)
------------ ------------
CAPITAL TRANSACTIONS:
Proceeds from Common Shares reinvested ............................. -- --
Repurchase of Common Shares ........................................ (1,287,590) (7,092,729)
------------ ------------
Net increase (decrease) in net assets resulting from capital
transactions .................................................... (1,287,590) (7,092,729)
------------ ------------
Total increase (decrease) in net assets ............................ (326,089) 31,351,675
NET ASSETS:
Beginning of period ................................................ 106,716,519 75,364,844
------------ ------------
End of period ...................................................... $106,390,430 $106,716,519
============ ============
Accumulated net investment income (loss) at end of period .......... $ (2,051,949) $ (915,972)
============ ============
CAPITAL SHARE TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period ............................... 5,400,233 5,855,188
Common Shares issued as reinvestment under the Dividend Reinvestment
Plan ............................................................ -- --
Common Shares repurchased* ......................................... (72,448) (454,955)
------------ ------------
Common Shares at end of period ..................................... 5,327,785 5,400,233
============ ============
* On November 17, 2008, the Fund commenced a share repurchase program for
purposes of enhancing shareholder value and reducing the discount at which
the Fund's shares trade from their net asset value. The program originally
expired on May 17, 2009, but on June 2, 2009, the Fund announced that the
Board of Trustees of the Fund (the "Board") authorized the continuation of
the Fund's share repurchase program. The program again expired on December
2, 2009, but on December 15, 2009, the Fund again announced that the Board
authorized continuation of the Fund's repurchase program. The program
expired on March 15, 2010. For the six months ended June 30, 2010 and the
year ended December 31, 2009, the Fund repurchased 72,448 and 454,955,
respectively, of its shares at an average discount of 10.45% and 11.47%,
respectively, from net asset value per share.
See Notes to Financial Statements
Page 17
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations .......... $ 4,690,951
Adjustments to reconcile net increase (decrease) in net assets
resulting from operations to net cash provided by operating activities:
Purchases of investments .............................................. (50,767,652)
Sales and maturities of investments ................................... 54,469,008
Net amortization/accretion of premium/discount on investments ......... (454,138)
Net realized gain/loss on investments ................................. (4,081,313)
Net change in unrealized appreciation/depreciation on investments ..... 1,566,630
Increase in net unrealized appreciation/depreciation on forward
foreign currency contracts ......................................... (103,596)
CHANGES IN ASSETS AND LIABILITIES:
Increase in dividends receivable ...................................... (82,577)
Increase in interest receivable ....................................... (157,960)
Increase in prepaid expenses .......................................... (18,227)
Increase in interest and fees on loan payable ......................... 5,954
Decrease in investment advisory fees payable .......................... (3,035)
Decrease in audit fees and tax fees payable ........................... (19,855)
Decrease in legal fees payable ........................................ (7,138)
Decrease in printing fees payable ..................................... (674)
Increase in transfer agent fees payable ............................... 763
Decrease in administrative fees payable ............................... (289)
Decrease in custodian fees payable .................................... (9,263)
Increase in other liabilities ......................................... 107,582
------------
CASH PROVIDED BY OPERATING ACTIVITIES .................................... $ 5,135,171
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of Common Shares ........................................... (1,359,087)
Distributions to Common Shareholders from net investment income ....... (3,729,450)
------------
CASH USED BY FINANCING ACTIVITIES ........................................ (5,088,537)
-----------
Increase in cash and foreign currency (a) ................................ 46,634
Cash and foreign currency at beginning of period ......................... 860,542
-----------
CASH AND FOREIGN CURRENCY AT END OF PERIOD ............................... $ 907,176
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees ........................ $ 81,306
===========
----------
(a) Includes net change in unrealized appreciation (depreciation) on foreign
currency of ($1,247).
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 YEAR YEAR PERIOD
6/30/2010 ENDED ENDED ENDED ENDED
(UNAUDITED) 12/31/2009 12/31/2008 12/31/2007 12/31/2006 (a)
----------- ---------- ---------- ---------- --------------
Net asset value, beginning of period ........ $ 19.76 $ 12.87 $ 21.69 $ 20.58 $ 19.10(b)
-------- -------- ------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ................ 0.48 1.01 1.09(c) 0.92 0.29
Net realized and unrealized gain (loss) ..... 0.40 7.16 (8.37) 2.00 1.58
-------- -------- ------- -------- --------
Total from investment operations ............ 0.88 8.17 (7.28) 2.92 1.87
-------- -------- ------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income ....................... (0.70) (0.81) (1.08) (0.79) (0.31)
Net realized gain ........................... -- -- (0.10) (1.02) --
Return of capital ........................... -- (0.63) (0.38) -- (0.04)
-------- -------- ------- -------- --------
Total distributions ......................... (0.70) (1.44) (1.56) (1.81) (0.35)
-------- -------- ------- -------- --------
Common Shares offering costs charged
to paid-in capital ....................... -- -- -- -- (0.04)
-------- -------- ------- -------- --------
Capital share repurchases ................... 0.03 0.16 0.02 -- --
-------- -------- ------- -------- --------
Net asset value, end of period .............. $ 19.97 $ 19.76 $ 12.87 $ 21.69 $ 20.58
======== ======== ======= ======== ========
Market value, end of period ................. $ 19.02 $ 18.04 $ 10.25 $ 19.50 $ 19.03
======== ======== ======= ======== ========
TOTAL RETURN BASED ON NET ASSET VALUE (d) ... 4.77% 69.25% (33.94)% 15.74% 9.74%
======== ======== ======= ======== ========
TOTAL RETURN BASED ON MARKET VALUE (d) ...... 9.30% 94.01% (41.48)% 12.53% (3.10)%
======== ======== ======= ======== ========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL
DATA:
Net assets, end of period (in 000's) ........ $106,390 $106,717 $75,365 $128,112 $121,519
Ratio of total expenses to average
net assets ............................... 1.77%(e) 2.11% 2.00% 2.04% 2.16%(e)
Ratio of total expenses to average net assets
excluding interest expense and fees on
loan ..................................... 1.60%(e) 1.80% 1.60% 1.58% 2.05%(e)
Ratio of net investment income to average
net assets ............................... 4.84%(e) 6.11% 5.73% 4.31% 4.27%(e)
Portfolio turnover rate ..................... 47% 66% 64% 95% 40%
INDEBTEDNESS:
Outstanding loan (in 000's) ................. $ 5,800 $ 5,800 $13,500 $ 8,000 $ 7,000
Asset coverage per $1,000 of
indebtedness (f) ......................... $ 19,343 $ 19,399 $ 6,583 $ 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) Based on average shares outstanding.
(d) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by the
Dividend Reinvestment Plan, and changes in net asset value per share for
net asset value returns and changes in Common Share price for market value
returns. Total returns do not reflect sales load and are not annualized for
periods less than one year. Past performance is not indicative of future
results.
(e) Annualized.
(f) 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, 2010 (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 (which includes the principal amount of any borrowings, minus
accrued liabilities). 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, the Fund's Board of Trustees has designated
First Trust Advisors L.P. ("First Trust") to use a fair value method to value
the Fund's securities 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") or the London Stock Exchange Alternative Investment Market
("AIM") are valued at the last sale price on the business day as of which such
value is being determined. Securities listed on the NASDAQ or the AIM are valued
at the official closing price on the business day as of which such value is
being determined. If there has been no sale on such day, or no official closing
price in the case of securities traded on the NASDAQ or the AIM, the securities
are valued at the mean of the most recent bid and ask prices on such day.
Portfolio securities traded on more than one securities exchange are valued at
the last sale price or official closing price, as applicable, 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 or the AIM, 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 when
purchased are valued at amortized cost.
Foreign securities traded outside the United States are generally valued as of
the time their trading is complete, which is usually different from the close of
the NYSE. Occasionally, events affecting the value of such securities may occur
between such times and the close of the NYSE that will not always be reflected
in the computation of the value of such securities. If events materially
affecting the value of such securities occur during such period, these
securities will be valued at their fair value according to procedures adopted by
the Fund's Board of Trustees. All securities and other assets of the Fund
initially expressed in foreign currencies will be converted to U.S. dollars
using exchange rates in effect at the time of valuation.
Page 20
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
JUNE 30, 2010 (UNAUDITED)
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
- Level 1 - Level 1 inputs are quoted prices in active markets for
identical securities. An active market is a market in which
transactions for the security occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
- Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
- Quoted prices for similar securities in active markets.
- Quoted prices for identical or similar securities in markets that
are non-active. A non-active market is a market where there are
few transactions for the security, the prices are not current, or
price quotations vary substantially either over time or among
market makers, or in which little information is released
publicly.
- Inputs other than quoted prices that are observable for the
security (for example, interest rates and yield curves observable
at commonly quoted intervals, volatilities, prepayment speeds,
loss severities, credit risks, and default rates).
- Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
- Level 3 - Level 3 inputs are unobservable inputs. Unobservable inputs
reflect the reporting entity's own assumptions about the assumptions
that market participants would use in pricing the security.
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 investments as of June 30, 2010 is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
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, 2010, the Fund had no
when-issued or delayed-delivery purchase commitments.
C. CREDIT LINKED NOTES:
The Fund may invest 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, 2010 (UNAUDITED)
D. FORWARD FOREIGN CURRENCY CONTRACTS:
The Fund is subject to foreign currency risk in the normal course of pursuing
its objective. 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 and the Schedule of Forward Foreign Currency Contracts. 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 would exceed the net unrealized value shown on the Schedule of
Forward Foreign Currency Contracts.
During the six months ended June 30, 2010, the open and close values of forward
foreign currency contracts were $7,863,335 and $57,487, respectively.
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 on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statement of Operations. Unrealized gains and losses on
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statement of Operations. Net realized foreign currency gains and losses
include the effect of changes in exchange rates between trade date and
settlement date on investment security transactions, foreign currency
transactions and interest and dividends received. The portion of foreign
currency gains and losses related to 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 character of distributions for tax reporting purposes will
depend on the Fund's investment experience during the remainder of its fiscal
year; however, based on information for the fiscal year through June 30, 2010,
it is likely that the Fund's distributions will include a return of capital
component for the fiscal year ending on December 31, 2010.
The tax character of distributions paid during the year ended December 31, 2009
was as follows:
Distributions paid from:
Ordinary Income ................................................. $4,606,552
Long-Term Capital Gains ......................................... --
Return of Capital ............................................... 3,534,075
As of December 31, 2009, the components of distributable earnings on a tax basis
were as follows:
Undistributed Ordinary Income ................................... $ --
Net Unrealized Appreciation (Depreciation) ...................... 13,492,040
Accumulated Capital and Other Losses ............................ (5,875,029)
Page 22
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
JUNE 30, 2010 (UNAUDITED)
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 ("the Code"), which includes distributing substantially all
of its net investment income and net realized gains to shareholders.
Accordingly, no provision has been made for federal or state income taxes.
The Fund intends to utilize provisions of the federal income tax laws, which
allows it to carry a realized capital loss forward for eight years following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At December 31, 2009, the
Fund had a capital loss carryforward for federal income tax purposes of
$5,609,855, with $495,817 and $5,114,038 expiring on December 31, 2016 and 2017,
respectively.
Certain capital losses realized after October 31 may be deferred and treated as
occurring on the first day of the following fiscal year. For the fiscal year
ended December 31, 2009, the Fund intends to elect to defer net realized foreign
currency losses of $265,174 incurred between November 1, 2009 and December 31,
2009.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ending 2006, 2007,
2008 and 2009 remain open to federal and state audit. As of June 30, 2010,
management has evaluated the application of these standards to the Fund, and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
H. EXPENSES:
The Fund pays all expenses directly related to its operations.
I. NEW ACCOUNTING PRONOUNCEMENT:
In January 2010, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") No. 2010-06 "Improving Disclosures about
Fair Value Measurements". ASU 2010-06 amends FASB Accounting Standards
Codification Topic 820, Fair Value Measurements and Disclosures, to require
additional disclosures regarding fair value measurements. Certain disclosures
required by ASU No. 2010-06 are currently effective for interim and annual
reporting periods beginning after December 15, 2009, and other required
disclosures are effective for fiscal years beginning after December 15, 2010,
and for interim periods within those fiscal years. Management is currently
evaluating the impact ASU No. 2010-06 will have on the Fund's financial
statement disclosures, if any.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
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 an indirect, wholly-owned
subsidiary of The PNC Financial Services Group, Inc ("PNC"), serves as the
Fund's Administrator, Fund Accountant and Transfer Agent in accordance with
certain fee arrangements. PFPC Trust Company, also an indirect, majority-owned
subsidiary of PNC, serves as the Fund's Custodian in accordance with certain fee
arrangements.
On July 1, 2010, PNC sold the outstanding stock of PNC Global Investment
Servicing Inc. to The Bank of New York Mellon Corporation. At the closing of the
sale, PNC Global Investment Servicing (U.S.) Inc. changed its name to BNY Mellon
Investment Servicing (US) Inc. PFPC Trust Company will not change its name until
a later date to be announced.
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 additional trust in 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.
Page 23
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
JUNE 30, 2010 (UNAUDITED)
Additionally, the Lead Independent Trustee is paid $10,000 annually, the
Chairman of the Audit Committee is paid $5,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and the Valuation Committee
are 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. 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.
The Lead Independent Trustee and each Committee chairman will serve two-year
terms ending December 31, 2011, before rotating to serve as a chairman of
another Committee or as Lead Independent Trustee. The officers and "Interested"
Trustee receive no compensation from the Fund for serving in such capacities.
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, 2010 were $51,307,652 and $54,946,626, respectively.
5. BORROWING
The Fund has entered into a revolving loan agreement with The Bank of Nova
Scotia, 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. As of June 30, 2010, the Fund had one loan outstanding under the
loan agreement of $5,800,000. For the six months ended June 30, 2010, the
average amount outstanding was $5,800,000. The high and low annual interest
rates during the six months ended June 30, 2010, were 1.65% and 1.53%,
respectively, and the weighted-average interest rate was 1.56%. The interest
rate at June 30, 2010 was 1.65%. The Fund also pays a commitment fee of 0.35%
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 15,
2010.
6. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
7. 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. When the Advisor or Sub-Advisor determines that it
is temporarily unable to follow the Fund's investment strategy or that it is
impractical to do so (such as when a market disruption event has occurred and
trading in the securities is extremely limited or absent), the Fund may take
temporary defensive positions.
NON-INVESTMENT GRADE SECURITIES RISK: The Fund may invest up to 80% of its
Managed Assets in non-investment grade securities. Non-investment grade
securities are rated below "Baa3" by Moody's Investors Service, Inc., below
"BBB-" by Standard & Poor's, or comparably rated by another nationally
recognized statistical rating organization or, if unrated, determined by the
Sub-Advisor to be of comparable credit quality. Non-investment grade debt
instruments are commonly referred to as "high-yield" or "junk" bonds and are
considered speculative with respect to the issuer's capacity to pay interest and
repay principal and are susceptible to default or decline in market value due to
adverse economic and business developments. The market values for high-yield
securities tend to be very volatile, and these securities are less liquid than
investment grade debt securities.
EMERGING MARKETS RISK: Under normal market conditions, the Fund will invest at
least 80% of its Managed Assets in equity or fixed-income securities of issuers
located in countries considered to be emerging markets. Investments in such
securities are considered speculative. In addition to the general risks of
investing in non-U.S. securities, heightened risks of investing in emerging
markets securities include: smaller market capitalization of securities markets,
which may suffer periods of relative illiquidity; significant price volatility;
restrictions on
Page 24
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
JUNE 30, 2010 (UNAUDITED)
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.
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.
CURRENCY RISK: The value of securities denominated or quoted in foreign
currencies may be adversely affected by fluctuations in the relative currency
exchange rates and by exchange control regulations. The Fund's investment
performance may be negatively affected by a devaluation of a currency in which
the Fund's investments are denominated or quoted. Further, the Fund's investment
performance may be significantly affected, either positively or negatively, by
currency exchange rates because the U.S. dollar value of securities denominated
or quoted in another currency will increase or decrease in response to changes
in the value of such currency in relation to the U.S. dollar. While certain of
the Fund's non-U.S. dollar-denominated securities may be hedged into U.S.
dollars, hedging may not alleviate all currency risks.
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 constitute a substantial lien and burden by reason of their prior claim
against the income of the Fund and against the net assets of the Fund in
liquidation. The rights of lenders to receive payments of interest on and
repayments of principal on any borrowings made by the Fund under a leverage
borrowing program are senior to the rights of holders of Common Shares, with
respect to payment of dividends or upon liquidation. If the Fund is not in
compliance with certain credit facility provisions, the Fund may not be
permitted to declare dividends or other distributions, including dividends and
distributions with respect to Common Shares or purchase Common Shares.
GOVERNMENT SECURITIES RISK: The ability of a government issuer, especially in an
emerging market country, to make timely and complete payments on its debt
obligations will be strongly influenced by the government issuer's balance of
payments, including export performance, its access to international credits and
investments, fluctuations of interest rates and the extent of its foreign
reserves. A country whose exports are concentrated in a few commodities or whose
economy depends on certain strategic imports could be vulnerable to fluctuations
in international prices of these commodities or imports. To the extent that a
country receives payment for its exports in currencies other than U.S. dollars,
its ability to make debt payments denominated in U.S. dollars could be adversely
affected. If a government issuer cannot generate sufficient earnings from
foreign trade to service its external debt, it may need to depend on continuing
loans and aid from foreign governments, commercial banks, and multinational
organizations. There are no bankruptcy proceedings similar to
Page 25
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
JUNE 30, 2010 (UNAUDITED)
those in the United States by which defaulted government debt may be collected.
Additional factors that may influence a government issuer's ability or
willingness to service debt include, but are not limited to, a country's cash
flow situation, the availability of sufficient foreign exchange on the date a
payment is due, the relative size of its debt service burden to the economy as a
whole, and the issuer's policy towards the International Monetary Fund, the
International Bank for Reconstruction and Development and other international
agencies to which a government debtor may be subject.
NON-U.S. GOVERNMENT SECURITIES RISK: Economies and social and political climates
in individual countries may differ unfavorably from the United States. Non-U.S.
economies may have less favorable rates of growth of gross domestic product,
rates of inflation, currency valuation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Many countries have
experienced extremely high rates of inflation for many years. Unanticipated
economic, political and social developments may also affect the values of the
Fund's investments and limit the availability of additional investments in such
countries. Furthermore, such developments may significantly disrupt the
financial markets or interfere with the Fund's ability to enforce its rights
against non-U.S. government issuers.
Investments in debt instruments of issuers located in emerging market countries
are considered speculative. Heightened risks of investing in emerging markets
government debt include: smaller market capitalization of securities markets,
which may suffer periods of relative illiquidity; significant price volatility;
restrictions on foreign investment; and possible repatriation of investment
income and capital. Furthermore, foreign investors may be required to register
the proceeds of sales and future economic or political crises could lead to
price controls, forced mergers, expropriation or confiscatory taxation, seizure,
nationalization or creation of government monopolies. The currencies of emerging
market countries may experience significant declines against the U.S. dollar,
and devaluation may occur subsequent to investments in these currencies by the
Fund. Inflation and rapid fluctuations in inflation rates have had, and may
continue to have, negative effects on the economies and securities markets of
certain emerging market countries.
8. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Fund through
the date the financial statements were issued, and has determined that besides
those subsequent events already disclosed there was the following subsequent
event:
On August 24, 2010, members of the Robert Donald Van Kampen family entered into
a Stock Purchase Agreement to sell 100% of the common stock of The Charger
Corporation to James A. Bowen, the President of First Trust. The transaction is
expected to be completed by September 21, 2010 and is subject to normal closing
conditions. The consummation of the transaction will be deemed to be "an
assignment" (as defined in the 1940 Act) of the Investment Management Agreement
between the Fund and First Trust, and will result in the automatic termination
of the agreement. Prior to consummation of the transaction, it is anticipated
that the Board of Trustees of the Fund will consider an interim investment
management agreement and a new ongoing investment management agreement with
First Trust, which will contain terms substantially identical to the existing
Investment Management Agreement. If approved by the Board of Trustees of the
Fund, the new ongoing investment management agreement will be presented for
shareholder approval.
Page 26
ADDITIONAL INFORMATION
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
JUNE 30, 2010 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (formerly 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 BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio 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 27
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
JUNE 30, 2010 (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 Strategic High
Income Fund III, First Trust Specialty Finance and Financial Opportunities Fund
and First Trust Active Dividend Income Fund was held on April 14, 2010. At the
Annual Meeting, Trustees James A. Bowen and Niel B. Nielson were elected by the
Common Shareholders of the First Trust/Aberdeen Emerging Opportunity Fund as
Class III Trustees for a three-year term expiring at the Fund's annual meeting
of shareholders in 2013. The number of votes cast in favor of Mr. Bowen was
4,562,883, the number of votes against was 128,437 and the number of abstentions
was 690,749. The number of votes cast in favor of Mr. Nielson was 4,563,673, the
number of votes against was 127,647 and the number of abstentions was 690,749.
Richard E. Erickson, Thomas R. Kadlec and Robert F. Keith are the other current
and continuing Trustees.
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING CONTINUATION OF INVESTMENT MANAGEMENT AND
SUB-ADVISORY AGREEMENTS
The Board of Trustees of First Trust/Aberdeen Emerging Opportunity Fund (the
"Fund"), including the Independent Trustees, 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
21-22, 2010. 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 to other clients of the Advisor and the Sub-Advisor and as compared to
fees charged by investment advisors and sub-advisors to comparable funds;
expenses of the Fund as compared to expense ratios of comparable funds; the
nature of expenses incurred in providing services to the Fund and the potential
for economies of scale, if any; financial data on the Advisor and the
Sub-Advisor; any fall out benefits to the Advisor and the Sub-Advisor; and
information on the Advisor's and the Sub-Advisor's compliance programs. 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.
The Board considered the Advisor's statements regarding the incremental benefits
associated with the Fund's advisor/sub-advisor management structure. With
respect to the Advisory Agreement, the Board considered that the Advisor is
responsible for the overall management and administration of the Fund, 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. The Board
also noted the enhancements made by the Advisor to the compliance program in
2009. With respect to the Sub-Advisory Agreement, the Board received a
presentation from representatives of the Sub-Advisor discussing the services
that the Sub-Advisor provides to the Fund and how the Sub-Advisor manages the
Fund's investments. In light of the information presented and the considerations
made, the Board con-
Page 28
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
JUNE 30, 2010 (UNAUDITED)
cluded 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, under the oversight of the
Advisor, has managed the Fund consistent with its investment objective and
policies.
The Board considered the advisory and sub-advisory fees paid under the
Agreements. The Board considered the advisory fees charged by the Advisor to
similar funds and other non-fund clients, 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 to which an
identical advisory fee rate was charged. The Board also considered information
provided by the Sub-Advisor as to the fees it charges to other clients, noting
that the Sub-Advisor does not manage any other closed-end funds directly
comparable to the Fund, but that the sub-advisory fee is generally lower than
the fees the Sub-Advisor charges to the other North American closed-end fixed
income and equity funds that it manages. In addition, the Board received 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 a combined peer group selected by Lipper and the
Advisor. The Board discussed with representatives of the Advisor the limitations
in creating a relevant peer group for the Fund, including that (i) the peer
funds may use different types of leverage which have different costs associated
with them; (ii) most peer funds do not employ an advisor/sub-advisor management
structure; (iii) the peer funds may not have the same fiscal year as the Fund,
which may cause the expense data used by Lipper to be measured over different
time periods; and (iv) many of the peer funds are larger than the Fund. The
Board reviewed the Lipper materials, but based on its discussions with the
Advisor, the Board determined that the Lipper data was of limited value for
purposes of its consideration of the renewal of the Agreements.
The Board also considered performance information for the Fund, noting that the
performance information included the Fund's quarterly performance report, which
is part of the process that the Board has established for monitoring the Fund's
performance on an ongoing basis, and had been enhanced to assess portfolio risk
as well. The Board determined that this process continues to be effective for
reviewing the Fund's performance. In addition to the Board's ongoing review of
performance, the Board also received data prepared by Lipper comparing the
Fund's performance to the combined peer group selected by Lipper and the
Advisor, as well as to a larger group and to a blended benchmark. The Board
reviewed the Lipper materials, but for similar reasons to those described above,
the Board determined that the performance data provided by Lipper was of limited
value. The Board considered an analysis prepared by the Advisor on the continued
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 combined peer group, noting that the Fund's premium/discount was
generally indicative of the asset class and market events. Based on the
information provided and the Board's ongoing review of the Fund's performance,
the Board concluded that the Fund's performance was reasonable.
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 considered whether fee levels reflect any economies of scale
for the benefit of shareholders. The Board concluded that the advisory fee
reflects an appropriate level of sharing of any economies of scale at current
asset levels. The Board also considered the costs of the services provided and
profits realized by the Advisor from serving as investment manager to the Fund
for the twelve months ended December 31, 2009, 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 limited.
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 29
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(FIRST TRUST LOGO)
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Aberdeen Asset Management Inc.
1735 Market Street, 32nd Floor
Philadelphia, PA 19103
ADMINISTRATOR, FUND ACCOUNTANT & TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
PFPC Trust Company
301 Bellevue Parkway
Wilmington, DE 19809
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
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.
REGISTRANT PURCHASES OF EQUITY SECURITIES
(A) TOTAL (D) MAXIMUM NUMBER (OR
NUMBER OF (C) TOTAL NUMBER OF SHARES APPROXIMATE DOLLAR VALUE) OF
SHARES (OR (B) AVERAGE PRICE (OR UNITS) PURCHASED AS PART SHARES (OR UNITS) THAT MAY YET BE
UNITS) PAID PER SHARE OF PUBLICLY ANNOUNCED PLANS PURCHASED UNDER THE PLANS OR
PERIOD PURCHASED (OR UNIT) OR PROGRAMS PROGRAMS
------ ---------- ----------------- ---------------------------- ---------------------------------
Month #1 31,235 $18.1382 536,238 172,519
(01/01/2010 - 01/31/2010)
Month #2 28,402 $17.1685 564,640 144,117
(02/01/2010 - 02/28/2010)
Month #3 12,811 $18.2204 577,451 0
(03/01/2010 - 03/31/2010)
Month #4 N/A N/A N/A N/A
(04/01/2010 - 04/30/2010)
Month #5 N/A N/A N/A N/A
(05/01/2010 - 05/31/2010)
Month #6 N/A N/A N/A N/A
(06/01/2010 - 06/30/2010)
Total 72,448 $17.7726 577,451 N/A
On November 17, 2008, the Fund commenced a share repurchase program for
purposes of enhancing shareholder value and reducing the discount at which the
Fund's shares trade from their net asset value. The program originally expired
on May 17, 2009, but on June 2, 2009, the Fund announced that the Board of
Trustees of the Fund (the "Board") authorized the continuation of the Fund's
share repurchase program. The program again expired on December 2, 2009, but on
December 15, 2009, the
Fund again announced that the Board authorized continuation of the Fund's
repurchase program. The program expired on March 15, 2010. For the six months
ended June 30, 2010 and the year ended December 31, 2009, the Fund repurchased
72,448 and 454,955, respectively, of its shares at an average discount of 10.45%
and 11.47%, respectively, from net asset value per share.
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 19, 2010
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 19, 2010
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------------------
Mark R. Bradley, Treasurer, Chief Financial Officer
and Chief Accounting Officer
(principal financial officer)
Date August 19, 2010
* Print the name and title of each signing officer under his or her
signature.