UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-Q
QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED MANAGEMENT
INVESTMENT COMPANY
Investment Company Act file number 811-21756
-----------
First Trust Strategic High Income 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: October 31
------------
Date of reporting period: January 31, 2011
------------------
Form N-Q is to be used by management investment companies, other than small
business investment companies registered on Form N-5 (ss.ss. 239.24 and 274.5 of
this chapter), to file reports with the Commission, not later than 60 days after
the close of the first and third fiscal quarters, pursuant to rule 30b1-5 under
the Investment Company Act of 1940 (17 CFR 270.30b1-5). The Commission may use
the information provided on Form N-Q in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-Q, and
the Commission will make this information public. A registrant is not required
to respond to the collection of information contained in Form N-Q 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 the
Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC
20549. The OMB has reviewed this collection of information under the clearance
requirements of 44 U.S.C. ss. 3507.
ITEM 1. SCHEDULE OF INVESTMENTS. The Schedule of Investments is attached
herewith.
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (a)
JANUARY 31, 2011 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
________________ _______________________________________ ____________ ____________ _______________
CORPORATE BONDS AND NOTES - 90.3%
AUTOMOTIVE - 1.2%
$ 400,000 Ford Motor Co. ........................ 6.50% 08/01/18 $ 420,552
_______________
BASIC INDUSTRY - 12.8%
455,000 AK Steel Corp. (b)..................... 7.63% 05/15/20 466,375
425,000 Arch Coal, Inc. (b).................... 8.75% 08/01/16 472,812
425,000 Cascades, Inc. (b)..................... 7.88% 01/15/20 444,125
215,000 Georgia-Pacific LLC (b)................ 7.38% 12/01/25 230,588
185,000 Georgia-Pacific LLC ................... 7.25% 06/01/28 195,638
275,000 Hexion U.S. Finance Corp./Hexion Nova
Scotia Finance ULC ................ 8.88% 02/01/18 297,687
425,000 Mercer International, Inc. (c)......... 9.50% 12/01/17 448,375
325,000 Steel Dynamics, Inc. (b) (c)........... 7.63% 03/15/20 349,375
450,000 Tembec Industries, Inc. (c)............ 11.25% 12/15/18 491,625
600,000 United States Steel Corp. (b).......... 7.00% 02/01/18 619,500
400,000 Westlake Chemical Corp. (b)............ 6.63% 01/15/16 415,000
_______________
4,431,100
_______________
CAPITAL GOODS - 12.2%
425,000 BE Aerospace, Inc. .................... 8.50% 07/01/18 464,312
90,000 Berry Plastics Corp. .................. 9.50% 05/15/18 95,400
425,000 Bombardier, Inc. (b) (c)............... 7.75% 03/15/20 467,500
400,000 CNH America LLC (b).................... 7.25% 01/15/16 436,000
245,000 Coleman Cable, Inc. ................... 9.00% 02/15/18 254,800
215,000 Mueller Water Products, Inc. .......... 7.38% 06/01/17 209,894
825,000 Owens-Illinois, Inc. (b)............... 7.80% 05/15/18 899,250
225,000 RBS Global, Inc./Rexnord LLC .......... 8.50% 05/01/18 242,438
400,000 Terex Corp. ........................... 8.00% 11/15/17 416,000
275,000 Trimas Corp. .......................... 9.75% 12/15/17 304,563
425,000 USG Corp. (d).......................... 9.75% 01/15/18 434,562
_______________
4,224,719
_______________
CONSUMER CYCLICAL - 9.3%
425,000 ACCO Brands Corp. (b).................. 10.63% 03/15/15 482,375
400,000 Easton-Bell Sports, Inc. .............. 9.75% 12/01/16 447,000
425,000 Ford Motor Credit Corp., LLC (b)....... 8.00% 12/15/16 482,637
425,000 Levi Strauss & Co. (b)................. 7.63% 05/15/20 446,781
425,000 Limited Brands, Inc. (b)............... 7.60% 07/15/37 416,500
220,000 Neiman Marcus Group, Inc. ............. 10.38% 10/15/15 233,750
250,000 Phillips-Van Heusen Corp. ............. 7.38% 05/15/20 268,438
425,000 Reynolds Group Issuer, Inc./Reynolds
Group Issuer LLC (c)............... 9.00% 04/15/19 448,375
_______________
3,225,856
_______________
CONSUMER NON-CYCLICAL - 5.3%
425,000 B&G Foods, Inc. ....................... 7.63% 01/15/18 452,625
500,000 C&S Group Enterprises LLC (c).......... 8.38% 05/01/17 498,125
425,000 Constellation Brands, Inc. (b)......... 7.25% 05/15/17 456,875
215,000 Rite Aid Corp. ........................ 8.63% 03/01/15 191,888
See Notes to Quarterly Portfolio of Investments Page 1
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JANUARY 31, 2011 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
________________ _______________________________________ ____________ ____________ _______________
CORPORATE BONDS AND NOTES - (CONTINUED)
CONSUMER NON-CYCLICAL - (CONTINUED)
$ 200,000 Rite Aid Corp. ........................ 9.75% 06/12/16 $ 224,000
_______________
1,823,513
_______________
ENERGY - 12.8%
200,000 Chaparral Energy, Inc. ................ 8.88% 02/01/17 210,000
425,000 Crosstex Energy LP/Crosstex Energy
Finance Corp. ..................... 8.88% 02/15/18 462,187
425,000 Edgen Murray Corp. .................... 12.25% 01/15/15 386,750
275,000 Hercules Offshore LLC (c).............. 10.50% 10/15/17 243,375
425,000 Hilcorp Energy I LP/Hilcorp Finance Co.
(b) (c)............................ 8.00% 02/15/20 463,250
120,000 Linn Energy LLC/Linn Energy Finance Corp.
(c)................................ 8.63% 04/15/20 132,000
400,000 McJunkin Red Man Corp. (c)............. 9.50% 12/15/16 398,500
495,000 Niska Gas Storage US LLC/Niska Gas Sorage
Canada ULC (b) (c)................. 8.88% 03/15/18 542,025
425,000 Pioneer Natural Resources Co. (b)...... 6.65% 03/15/17 456,620
425,000 Plains Exploration & Production Co. ... 7.63% 06/01/18 454,750
170,000 Precision Drilling Corp. (c)........... 6.63% 11/15/20 176,163
500,000 Whiting Petroleum Corp. ............... 6.50% 10/01/18 518,125
_______________
4,443,745
_______________
MEDIA - 10.1%
285,000 American Reprographics Co. (c)......... 10.50% 12/15/16 303,525
425,000 Cablevision Systems Corp. (b).......... 8.63% 09/15/17 477,062
425,000 CCO Holdings LLC/CCO Holdings Capital
Corp. (c).......................... 8.13% 04/30/20 454,750
425,000 Deluxe Corp. (b)....................... 7.38% 06/01/15 443,063
425,000 Dish DBS Corp. (b)..................... 7.88% 09/01/19 452,094
425,000 Insight Communications Co., Inc. (c)... 9.38% 07/15/18 466,437
425,000 Lamar Media Corp. ..................... 7.88% 04/15/18 453,687
425,000 Mediacom LLC/Mediacom Capital Corp. ... 9.13% 08/15/19 440,938
_______________
3,491,556
_______________
SERVICES - 15.0%
400,000 AMC Entertainment, Inc. ............... 8.75% 06/01/19 431,000
425,000 ARAMARK Corp. ......................... 8.50% 02/01/15 445,187
425,000 Avis Budget Car Rental LLC/Avis Budget
Finance, Inc. ..................... 9.63% 03/15/18 469,625
200,000 Beazer Homes USA, Inc. ................ 9.13% 06/15/18 204,000
400,000 Harrah's Operating Co., Inc. .......... 11.25% 06/01/17 456,000
400,000 HCA, Inc. (b).......................... 9.25% 11/15/16 432,500
400,000 Iron Mountain, Inc. (b)................ 8.75% 07/15/18 425,500
97,000 KAR Holdings, Inc. .................... 10.00% 05/01/15 103,305
300,000 Maxim Crane Works LP (c)............... 12.25% 04/15/15 305,250
225,000 MGM Resorts International ............. 5.88% 02/27/14 214,313
225,000 MGM Resorts International ............. 10.38% 05/15/14 255,937
425,000 Pulte Group, Inc. ..................... 6.38% 05/15/33 325,125
See Notes to Quarterly Portfolio of Investments Page 2
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JANUARY 31, 2011 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
________________ _______________________________________ ____________ ____________ _______________
CORPORATE BONDS AND NOTES - (CONTINUED)
SERVICES - (CONTINUED)
$ 225,000 RSC Equipment Rental, Inc./RSC Holdings
III LLC ........................... 10.25% 11/15/19 $ 250,875
425,000 Standard Pacific Corp. ................ 8.38% 05/15/18 444,125
425,000 United Rentals North America, Inc. .... 8.38% 09/15/20 446,250
_______________
5,208,992
_______________
TECHNOLOGY & ELECTRONICS - 1.9%
22,000 First Data Corp. ...................... 9.88% 09/24/15 22,055
96,000 First Data Corp. (c)................... 8.25% 01/15/21 92,880
500,000 Freescale Semiconductor, Inc. (c)...... 9.25% 04/15/18 556,250
_______________
671,185
_______________
TELECOMMUNICATIONS - 7.4%
215,000 Cincinnati Bell, Inc. ................. 8.25% 10/15/17 218,225
210,000 Cincinnati Bell, Inc. ................. 8.38% 10/15/20 205,275
400,000 Citizens Communications (b)............ 7.13% 03/15/19 422,000
400,000 Global Crossing Ltd. .................. 12.00% 09/15/15 462,000
200,000 PAETEC Holding Corp. .................. 9.50% 07/15/15 210,500
200,000 PAETEC Holding Corp. .................. 8.88% 06/30/17 216,000
400,000 Qwest Corp. (b)........................ 6.88% 09/15/33 398,000
425,000 Windstream Corp. (b)................... 7.00% 03/15/19 425,000
_______________
2,557,000
_______________
UTILITY - 2.3%
425,000 Calpine Corp. (c)...................... 7.25% 10/15/17 436,687
225,000 Dynegy Holdings, Inc. ................. 7.75% 06/01/19 162,563
225,000 Edison Mission Energy ................. 7.00% 05/15/17 185,625
_______________
784,875
_______________
TOTAL CORPORATE BONDS AND NOTES .................................... 31,283,093
(Cost $29,754,243) _______________
MORTGAGE-BACKED SECURITIES - 20.8%
COLLATERALIZED MORTGAGE OBLIGATIONS - 8.4%
Chase Mortgage Finance Corp.
143,804 Series 2007-S2, Class 1A8 ......... 6.00% 03/25/37 132,875
Citicorp Mortgage Securities, Inc.
660,000 Series 2007-2, Class 1A3 .......... 6.00% 02/25/37 648,200
Countrywide Alternative Loan Trust
98,509 Series 2006-41CB, Class 2A14 ...... 6.00% 01/25/37 83,874
Countrywide Home Loan Mortgage Pass
Through Trust
470,477 Series 2005-27, Class 2A1 ......... 5.50% 12/25/35 430,931
314,000 Series 2007-10, Class A5 .......... 6.00% 07/25/37 261,799
HarborView Mortgage Loan Trust
3,680,848 Series 2005-9, Class B10 (e)....... 2.01% 06/20/35 325,632
JP Morgan Mortgage Trust
78,753 Series 2006-S3, Class 1A30 ........ 6.50% 08/25/36 72,979
Residential Asset Securitization Trust
398,069 Series 2005-A8CB, Class A11 ....... 6.00% 07/25/35 366,472
See Notes to Quarterly Portfolio of Investments Page 3
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JANUARY 31, 2011 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
________________ _______________________________________ ____________ ____________ _______________
MORTGAGE-BACKED SECURITIES - (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS - (CONTINUED)
Structured Asset Securities Corp.
$ 66,168 Series 2003-10, Class A ........... 6.00% 04/25/33 $ 70,112
Wells Fargo Mortgage Backed Securities
Trust
308,000 Series 2006-8, Class A15 .......... 6.00% 07/25/36 296,235
216,485 Series 2007-7, Class A38 .......... 6.00% 06/25/37 209,965
28,241 Series 2007-8, Class 1A16 ......... 6.00% 07/25/37 25,652
_______________
2,924,726
_______________
COMMERCIAL MORTGAGE-BACKED SECURITIES - 12.4%
Banc of America Commercial Mortgage, Inc.
778,723 Series 2000-1, Class M (g) (h)..... 6.00% 11/15/31 8
Banc of America Large Loan, Inc.
2,000,000 Series 2005-MIB1, Class L (e) (f) (g) 3.26% 03/15/22 674,394
Citigroup/Deutsche Bank Commercial Mortgage
Trust
310,000 Series 2007-CD4, Class A4 ......... 5.32% 12/11/49 323,336
Commercial Mortgage Pass Through
Certificates
330,000 Series 2007-C9, Class A4 (e)....... 5.81% 12/10/49 357,922
Credit Suisse Mortgage Capital Certificates
60,000 Series 2006-C5, Class AJ .......... 5.37% 12/15/39 53,776
Extended Stay America Trust
830,000 Series 2010-ESHA, Class D (c)...... 5.50% 11/05/27 845,256
GE Capital Commercial Mortgage Corp.
700,000 Series 2000-1, Class G (f) (g)..... 6.13% 01/15/33 286,473
Greenwich Capital Commercial Funding
Corp.
200,000 Series 2007-GG11, Class A4 ........ 5.74% 12/10/49 212,522
330,000 Series 2007-GG11, Class AJ ........ 6.00% 12/10/49 293,645
LB-UBS Commercial Mortgage Trust
3,025,000 Series 2001-C7, Class Q (g)........ 5.87% 11/15/33 136,211
773,848 Series 2001-C7, Class S (g)........ 5.87% 11/15/33 14,178
Morgan Stanley Capital I, Inc.
968,400 Series 1999-WF1, Class M (g)....... 5.91% 11/15/31 819,962
2,787,919 Series 2003-IQ5, Class O (f) (g)... 5.24% 04/15/38 261,971
_______________
4,279,654
_______________
TOTAL MORTGAGE-BACKED SECURITIES ................................... 7,204,380
(Cost $7,591,302) _______________
ASSET-BACKED SECURITIES - 10.4%
Ace Securities Corp.
322,000 Series 2003-MH1, Class A4 (c)...... 6.50% 08/15/30 343,986
Bombardier Capital Mortgage
Securitization Corp.
308,658 Series 1999-B, Class A1B .......... 6.61% 12/15/29 184,757
1,106,347 Series 1999-B, Class A3 ........... 7.18% 12/15/29 706,359
See Notes to Quarterly Portfolio of Investments Page 4
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JANUARY 31, 2011 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
________________ _______________________________________ ____________ ____________ _______________
ASSET-BACKED SECURITIES - (CONTINUED)
Conseco Finance Securitizations Corp.
$ 2,720,628 Series 2000-6, Class M1 ........... 7.72% 09/01/31 $ 699,536
Countrywide Asset-Backed Certificates
232,948 Series 2006-13, Class 3AV2 (e)..... 0.41% 01/25/37 164,301
Credit Suisse First Boston Mortgage
Securities Corp.
100,966 Series 2002-MH3, Class A .......... 6.70% 12/25/31 104,996
Falcon Franchise Loan Trust
4,905,000 Series 2000-1, Class E (c) (f)..... 6.50% 04/05/16 49,050
4,231,000 Series 2003-1, Class E (g) (h)..... 6.00% 01/05/25 5,500
Green Tree Financial Corp.
208,298 Series 1997-4, Class B1 ........... 7.23% 02/15/29 24,725
858,461 Series 1998-4, Class M1 ........... 6.83% 04/01/30 383,426
3,844,951 Series 1999-3, Class M1 ........... 6.96% 02/01/31 512,327
GSAMP Trust
440,199 Series 2004-AR2, Class B4 (g)...... 5.00% 08/25/34 15,171
968,788 Series 2006-S3, Class A2 (f)....... 5.77% 05/25/36 59,480
848,537 Series 2006-S5, Class A1 (e)....... 0.35% 09/25/36 26,589
Cndependence III CDO, Ltd.
5,000,000 Series 3A, Class C1 (e) (g) (i).... 2.80% 10/03/37 33,450
Long Beach Mortgage Loan Trust
1,912,209 Series 2006-A, Class A2 (f)........ 6.05% 05/25/36 93,581
Park Place Securities, Inc.
1,564,299 Series 2004-WCW1, Class M8 (e)..... 3.76% 09/25/34 36,155
1,301,976 Series 2004-WCW2, Class M10 (e) (g) 3.01% 10/25/34 70,527
Stanfield Azure CLO, Ltd.
77,999 Series 2006-1A, Class X (c)........ 5.34% 05/27/20 78,550
Summit CBO I, Ltd.
4,219,712 Series 1A, Class B (e) (g) (h)..... 1.44% 05/23/11 5,486
Summit Lake CLO, Ltd.
13,656 Series 2005-1A, Class X (c)........ 5.25% 02/24/11 13,698
_______________
TOTAL ASSET-BACKED SECURITIES ...................................... 3,611,650
(Cost $3,446,262) _______________
SENIOR FLOATING-RATE LOAN INTERESTS - 0.5%
UTILITY - 0.5%
223,269 Texas Competitive Electric Holdings Co.,
LLC Tranche B2 (e)................. 3.30% 10/10/14 184,511
_______________
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS .......................... 184,511
(Cost $193,290) _______________
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 0.1%
COMMERCIAL MORTGAGE-BACKED SECURITIES - 0.1%
FannieMae-ACES
2,497,896 Series 1998-M7, Class N, IO (e).... 0.63% 05/25/36 15,113
_______________
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES ............ 15,113
(Cost $105,240) _______________
See Notes to Quarterly Portfolio of Investments Page 5
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JANUARY 31, 2011 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
________________ _______________________________________ ____________ ____________ _______________
STRUCTURED NOTES - 0.0%
$ 3,750,000 Preferred Term Securities XXV, Ltd. (g) (j) 06/22/37 $ 375
_______________
TOTAL STRUCTURED NOTES ............................................. 375
_______________
(Cost $0)
SHARES DESCRIPTION VALUE
________________ ______________________________________________________________________ _______________
PREFERRED SECURITIES - 0.1%
2,000 Soloso CDO, Ltd., Series 2005-1 (g) (j)............................. 20,000
3,000 White Marlin CDO, Ltd., Series AI (g) (i) (j)....................... 15,000
_______________
TOTAL PREFERRED SECURITIES ......................................... 35,000
(Cost $0) _______________
TOTAL INVESTMENTS - 122.2% ......................................... 42,334,122
(Cost $41,090,337) (k)
PRINCIPAL
VALUE DESCRIPTION AMOUNT
_______________ ______________________________________________________________________ _______________
REVERSE REPURCHASE AGREEMENTS - (28.0%)
$ (3,774,054) With Barclays Capital Inc. 1.00% dated 01/18/11, to be repurchased at
$3,777,724 on 02/22/11 ............................................. (3,774,054)
(3,663,820) With Barclays Capital Inc. 1.00% dated 01/19/11, to be repurchased at
$3,667,381 on 02/23/11 ............................................. (3,663,820)
(2,247,087) With Barclays Capital Inc. 1.00% dated 01/20/11, to be repurchased at
$2,249,272 on 02/24/11 ............................................. (2,247,087)
_______________
TOTAL REVERSE REPURCHASE AGREEMENTS ................................ (9,684,961)
_______________
NET OTHER ASSETS AND LIABILITIES - 5.8% ............................ 1,997,004
_______________
NET ASSETS - 100.0% ................................................ $ 34,646,165
===============
______________________________________________
(a) All percentages shown in the Portfolio of Investments are based on
net assets.
(b) This security or a portion of this security is segregated as
collateral for reverse repurchase agreements.
(c) This security, sold within the terms of a private placement
memorandum, is exempt from registration upon resale under Rule 144A
under the Securities Act of 1933, as amended (the "1933 Act"), and
may be resold in transactions exempt from registration, normally to
qualified institutional buyers. Pursuant to procedures adopted by
the Fund's Board of Trustees, this security has been determined to
be liquid by Brookfield Investment Management Inc., the Fund's
investment sub-advisor. Although market instability can result in
periods of increased overall market illiquidity, liquidity for each
security is determined based on security specific factors and
assumptions, which require subjective judgment. At January 31, 2011,
securities noted as such amounted to $8,605,007 or 22.84% of net
assets.
(d) Multi-Step Coupon Bond - coupon steps up or down based upon ratings
changes by Standard & Poor's Ratings Group or Moody's Investors
Service, Inc. The interest rate shown reflects the rate in effect at
January 31, 2011.
(e) Floating rate security. The interest rate shown reflects the rate in
effect at January 31, 2011.
(f) Security is receiving less than the stated coupon.
See Notes to Quarterly Portfolio of Investments Page 6
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JANUARY 31, 2011 (UNAUDITED)
(g) This security, sold within the terms of a private placement
memorandum, is exempt from regiupon resale under Rule 144A under the
1933 Act, and may be resold in transactions exempt from
registration, normally to qualified institutional buyers (see Note C
- Restricted Securities in the Notes to Quarterly Portfolio of
Investments).
(h) Security missed one or more of its interest payments.
(i) The issuer is in default. Income is not being accrued.
(j) Zero coupon security.
(k) Aggregate cost for financial reporting purposes, which approximates
the aggregate cost for federal income tax purposes. As of January
31, 2011, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$3,057,892 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$1,814,107.
ACES Alternative Credit Enhancement Securities
CBO Collateralized Bond Obligation
CDO Collateralized Debt Obligation
CLO Collateralized Loan Obligation
IO Interest-Only Security - Principal amount shown represents par value
on which interest payments are based.
__________________________________________
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of January 31,
2011 is as follows (see Note A - Portfolio Valuation in the Notes to Quarterly
Portfolio of Investments):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
1/31/2011 PRICES INPUTS INPUTS
______________ ___________ ______________ _____________
Corporate Bonds and Notes*....................... $ 31,283,093 $ -- $ 31,283,093 $ --
Mortgage-Backed Securities:
Collateralized Mortgage Obligations.......... 2,924,726 -- 2,924,726 --
Commercial Mortgage-Backed Securities........ 4,279,654 -- 4,279,654 --
Asset-Backed Securities.......................... 3,611,650 -- 3,537,916 73,734
Senior Floating-Rate Loan Interests*............. 184,511 -- 184,511 --
U.S. Government Agency Mortgage-Backed
Securities .................................... 15,113 -- 15,113 --
Structured Notes................................. 375 -- 375 --
Preferred Securities............................. 35,000 -- -- 35,000
______________ ___________ ______________ _____________
TOTAL INVESTMENTS................................ $ 42,334,122 $ -- $ 42,225,388 $ 108,734
============== =========== ============== =============
* See the Portfolio of Investments for industry breakout.
See Notes to Quarterly Portfolio of Investments Page 7
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JANUARY 31, 2011 (UNAUDITED)
The following table presents the Fund's investments measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the period presented.
INVESTMENTS AT FAIR CHANGE IN NET
VALUE USING SIGNIFICANT BALANCE AS OF TRANSFERS IN NET REALIZED UNREALIZED NET BALANCE AS OF
UNOBSERVABLE INPUTS OCTOBER 31, (OUT) OF GAINS APPRECIATION PURCHASES JANUARY 31,
( LEVEL 3) 2010 LEVEL 3 (LOSSES) (DEPRECIATION) (SALES) 2011
________________________________________________________________________________________________________________________
Asset-Backed Securities $ 87,636 $ -- $ (137) $ (230) $(13,535) $ 73,734
Preferred Securities 35,000 -- -- -- -- 35,000
___________________________________________________________________________________________
TOTAL INVESTMENTS $ 122,636 $ -- $ (137) $ (230) $(13,535) $108,734
===========================================================================================
See Notes to Quarterly Portfolios of Investments Page 8
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS
FIRST TRUST STRATEGIC HIGH INCOME FUND
JANUARY 31, 2011 (UNAUDITED)
VALUATION AND INVESTMENT PRACTICES
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of First Trust Strategic High
Income Fund (the "Fund") determined daily as of the close of regular trading on
the New York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on each
day the NYSE is open for trading. If the NYSE closes early on a valuation day,
the NAV is determined as of that time. Domestic debt securities and foreign
securities are priced using data reflecting the earlier closing of the principal
markets for those securities. The NAV per Common Share is calculated by dividing
the value of all assets of the Fund (including accrued interest and dividends),
less all liabilities (including accrued expenses, dividends declared but unpaid
and any borrowings of the Fund), by the total number of Common Shares
outstanding.
The Fund's investments are valued daily in accordance with valuation procedures
adopted by the Fund's Board of Trustees, and in accordance with provisions of
the Investment Company Act of 1940, as amended (the "1940 Act"). Securities for
which market quotations are readily available are valued using the last reported
sale price on the business day as of which such value is being determined. If no
sales are reported on such business day (as in the case of some securities
traded over-the-counter), the last reported bid price is used, except that
certain U.S. Government securities are valued at the mean between the last
reported bid and asked prices. Mortgage-backed securities ("MBS") and other debt
securities not traded in an organized market are valued on the basis of
valuations provided by dealers who make markets in such securities or by an
independent pricing service approved by the Fund's Board of Trustees, which may
use the following valuation inputs when available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
A ready market does not exist for some of these investments. As such, these
values may differ from the values that would have been used had a ready market
for these investments existed, and the differences could be material.
Debt securities having a remaining maturity of sixty days or less when purchased
are valued at cost adjusted for amortization of premiums and accretion of
discounts.
In the event that market quotations are not readily available, the pricing
service or dealer does not provide a valuation, or the valuations received 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. Additionally, if events occur after the close of the principal
markets for certain securities (e.g., domestic debt and foreign securities) that
could materially affect the Fund's NAV, First Trust may use a fair value method
to value the Fund's securities. The use of fair value pricing is governed by
valuation procedures adopted by the Fund's Board of Trustees, and in accordance
with the provisions of the 1940 Act. As a general principle, the fair value of a
security is the amount which the Fund might reasonably expect to receive for the
security upon its current sale. However, in light of the judgment involved in
fair valuations, there can be no assurance that a fair value assigned to a
particular security will be the amount which the Fund might be able to receive
upon its current sale. Fair valuation of a security is based on the
consideration of all available information, including, but not limited to, the
following:
1) the fundamental business data relating to the issuer;
2) an evaluation of the forces which influence the market in which these
securities are purchased and sold;
3) the type, size and cost of security;
4) the financial statements of the issuer;
5) the credit quality and cash flow of the issuer, based on the Sub-
Advisor's or external analysis;
6) the information as to any transactions in or offers for the security;
7) the price and extent of public trading in similar securities (or equity
securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing the
security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an assessment
of the issuer's management;
11) the prospects for the issuer's industry, and multiples (of earnings
and/or cash flows) being paid for similar businesses in that industry;
and
12) other relevant factors.
Page 9
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS - (CONTINUED)
FIRST TRUST STRATEGIC HIGH INCOME FUND
JANUARY 31, 2011 (UNAUDITED)
The Fund invests a significant portion of its assets in below-investment grade
debt securities, including structured finance securities and corporate bonds.
Structured finance securities include: asset-backed securities, including home
equity, auto, equipment lease, credit card, aircraft, franchise, manufactured
housing, etc.; commercial mortgage-backed securities; residential
mortgage-backed or private-label collateralized mortgage obligations;
collateralized debt obligations and collateralized loan obligations. The value
and related income of these securities is sensitive to changes in economic
conditions, including delinquencies and/or defaults. Instability in the markets
for fixed-income securities, particularly mortgage-backed and asset-backed
securities, has resulted in increased volatility and periods of illiquidity that
have adversely impacted the valuation of certain securities held by the Fund.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for identical
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.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar securities in active markets.
o 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.
o 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).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable inputs may
reflect the reporting entity's own assumptions about the assumptions that
market participants would use in pricing the 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 January 31, 2011, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Securities purchased on a when-issued, delayed-delivery or forward purchase
commitment basis may have extended settlement periods. The value of the security
so purchased is subject to market fluctuations during this period. The Fund
maintains liquid assets with a current value at least equal to the amount of its
when-issued, delayed-delivery or forward purchase commitments until payment is
made. At January 31, 2011, the Fund had no when-issued, delayed-delivery or
forward purchase commitments.
C. RESTRICTED SECURITIES:
The Fund invests in restricted securities, which are securities that may not be
offered for public sale without first being registered under the 1933 Act. Prior
to registration, restricted securities may only be resold in transactions exempt
from registration under Rule 144A under the 1933 Act, normally to qualified
institutional buyers. As of January 31, 2011, the Fund held restricted
securities as shown in the following table that the Brookfield Investment
Management Inc. has deemed illiquid pursuant to procedures adopted by the Fund's
Board of Trustees. Although market instability can result in periods of
increased overall market illiquidity, liquidity for each security is determined
based on security-specific factors and assumptions, which require subjective
judgment. The Fund does not have the right to demand that such securities be
registered. These securities are valued according to the valuation procedures as
stated in the Portfolio Valuation footnote (Note A) and are not expressed as a
discount to the carrying value of a comparable unrestricted security. There are
no unrestricted securities with the same maturity dates and yields for these
issuers.
Page 10
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS - (CONTINUED)
FIRST TRUST STRATEGIC HIGH INCOME FUND
JANUARY 31, 2011 (UNAUDITED)
% OF
ACQUISITION PRINCIPAL CARRYING NET
SECURITY DATE VALUE/SHARES PRICE COST VALUE ASSETS
__________________________________________________________________________________________________________________________________
Banc of America Commercial Mortgage, Inc.
Series 2000-1, Class M, 6.00%, 11/15/31 08/22/05 $ 778,723 $ 0.00 * $ - $ 8 0.00 % **
Banc of America Large Loan, Inc.
Series 2005-MIB1, Class L, 3.26%, 03/15/22 08/26/06 $ 2,000,000 33.72 520,128 674,394 1.95
Falcon Franchise Loan Trust
Series 2003-1, Class E, 6.00%, 01/05/25 08/09/05 $ 4,231,000 0.13 - 5,500 0.02
GE Capital Commercial Mortgage Corp.
Series 2000-1, Class G, 6.13%, 01/15/33 06/27/07 $ 700,000 40.92 478,396 286,473 0.83
GSAMP Trust
Series 2004-AR2, Class B4, 5.00%, 08/25/34 08/17/05 $ 440,199 3.45 - 15,171 0.04
Independence III CDO, Ltd.
Series 3A, Class C1, 2.80%, 10/03/37 12/27/06 $ 5,000,000 0.67 - 33,450 0.10
LB-UBS Commercial Mortgage Trust
Series 2001-C7, Class Q, 5.87%, 11/15/33 09/19/05 $ 3,025,000 4.50 - 136,211 0.39
Series 2001-C7, Class S, 5.87%, 11/15/33 09/29/05 $ 773,848 1.83 - 14,178 0.04
Morgan Stanley Capital I, Inc.
Series 1999-WF1, Class M, 5.91%, 11/15/31 08/03/05 $ 968,400 84.67 717,462 819,962 2.37
Series 2003-IQ5, Class O, 5.24%, 04/15/38 10/19/06 $ 2,787,919 9.40 2,592 261,971 0.75
Park Place Securities, Inc.
Series 2004-WCW2, Class M10, 3.01%, 10/25/34 03/24/06 $ 1,301,976 5.42 120,334 70,527 0.20
Preferred Term Securities XXV, Ltd.
Zero Coupon, 06/22/37 03/22/07 $ 3,750,000 0.00 * - 375 0.00 **
Soloso CDO, Ltd., Series 2005-1 11/30/05 $ 2,000 10.00 - 20,000 0.06
Summit CBO I, Ltd
Series 1A, Class B, 1.44%, 05/23/11 08/03/05 $ 4,219,712 0.13 72,625 5,486 0.02
White Marlin CDO, Ltd., Series AI 06/01/07 $ 3,000 5.00 - 15,000 0.04
---------- ----------- ---------
$1,911,537 $ 2,358,706 6.81 %
========== =========== =========
* Amount is less than $0.01.
** Amount is less than 0.01%.
D. REVERSE REPURCHASE AGREEMENTS:
Reverse repurchase agreements are utilized as leverage for the Fund. A reverse
repurchase agreement, although structured as a sale and repurchase obligation,
acts as a financing under which Fund assets are pledged as collateral to secure
a short-term loan. Generally, the other party to the agreement makes the loan in
an amount equal to a percentage of the market value of the pledged collateral.
At the maturity of the reverse repurchase agreement, the loan will be repaid and
the collateral will correspondingly be received back to the Fund. While used as
collateral, the assets continue to pay principal and interest which are for the
benefit of the Fund.
Information for the period ended January 31, 2011:
Maximum amount outstanding during the period.................. $9,684,961
Average amount outstanding during the period*................. $8,787,235
Average monthly Common Shares outstanding during the period... 9,150,594
Average debt per Common Share outstanding during the period... $0.96
* The average amount outstanding during the period was calculated by adding the
borrowings at the end of each day and dividing the sum by the number of days in
the period ended January 31, 2011.
During the period ended January 31, 2011, interest rate was 1.00% on borrowings
by the Fund under reverse repurchase agreements, which had interest expense that
aggregated $22,456.
Page 11
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS - (CONTINUED)
FIRST TRUST STRATEGIC HIGH INCOME FUND
JANUARY 31, 2011 (UNAUDITED)
E. INTEREST-ONLY SECURITIES:
An interest-only security ("IO Security") is the interest-only portion of a
mortgage-backed security ("MBS") that receives some or all of the interest
portion of the underlying MBS and little or no principal. A reference principal
value called a notional value is used to calculate the amount of interest due to
the IO Security. IO securities are sold at a deep discount to their notional
principal amount. Generally speaking, when interest rates are falling and
prepayment rates are increasing, the value of an IO Security will fall.
Conversely, when interest rates are rising and prepayment rates are decreasing,
generally the value of an IO Security will rise. These securities, if held in
the Fund, are identified on the Portfolio of Investments.
F. MORTGAGE DOLLAR ROLLS:
The Fund may enter into mortgage dollar rolls in which the Fund sells
mortgage-backed securities for delivery in the current month, realizing a gain
or loss, and simultaneously contracts to repurchase substantially similar (same
type, coupon and maturity) securities to settle on a specified future date.
The Fund executes its mortgage dollar rolls entirely in the TBA market, whereby
the Fund makes a forward commitment to purchase a security and, instead of
accepting delivery, the position is offset by a sale of the security with a
simultaneous agreement to repurchase at a future date. The Fund accounts for
mortgage dollar rolls as purchases and sales.
The risk of entering into mortgage dollar rolls is that the market value of the
securities the Fund is obligated to repurchase under the agreement may decline
below the repurchase price. In the event the buyer of securities under a
mortgage dollar roll files for bankruptcy or becomes insolvent, the Fund's use
of the proceeds of the mortgage dollar roll may be restricted pending a
determination by the counterparty, or its trustee or receiver, whether to
enforce the Fund's obligation to repurchase the securities.
G. COLLATERALIZED DEBT OBLIGATIONS:
A collateralized debt obligation ("CDO") is an asset-backed security whose
underlying collateral is typically a portfolio of bonds or bank loans. Where the
underlying collateral is a portfolio of bonds, a CDO is referred to as a
collateralized bond obligation ("CBO"). Where the underlying collateral is a
portfolio of bank loans, a CDO is referred to as a collateralized loan
obligation ("CLO"). Investors in CDOs bear the credit risk of the underlying
collateral. Multiple tranches of securities are issued by the CDO, offering
investors various maturity and credit risk characteristics. Tranches are
categorized as senior, mezzanine, and subordinated/equity, according to their
degree of risk. If there are defaults or the CDO's collateral otherwise
underperforms, scheduled payments to senior tranches take precedence over those
of mezzanine tranches, and scheduled payments to mezzanine tranches take
precedence over those to subordinated/equity tranches. CDOs, similar to other
asset-backed securities, are subject to prepayment risk.
Page 12
ITEM 2. 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 last fiscal quarter
that have materially affected, or are reasonably likely to materially
affect, the registrant's internal control over financial reporting.
ITEM 3. EXHIBITS.
Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 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 Strategic High Income 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 March 23, 2011
------------------------
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 March 23, 2011
------------------------
By (Signature and Title)* /s/ Mark R. Bradley
-----------------------------------------------------
Mark R. Bradley, Treasurer, Chief Financial Officer
and Chief Accounting Officer
(principal financial officer)
Date March 23, 2011
------------------------
* Print the name and title of each signing officer under his or her signature.