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, 2017
---------------
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST/ABERDEEN
EMERGING OPPORTUNITY FUND (FEO)
--------------------------------------------------------------------------------
SEMI-ANNUAL REPORT
FOR THE SIX MONTHS ENDED
JUNE 30, 2017
ABERDEEN
Asset Management FIRST TRUST
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
SEMI-ANNUAL REPORT
JUNE 30, 2017
Shareholder Letter.......................................................... 1
At a Glance................................................................. 2
Portfolio Commentary........................................................ 4
Portfolio of Investments.................................................... 8
Statement of Assets and Liabilities......................................... 17
Statement of Operations..................................................... 18
Statements of Changes in Net Assets......................................... 19
Statement of Cash Flows..................................................... 20
Financial Highlights........................................................ 21
Notes to Financial Statements............................................... 22
Additional Information...................................................... 30
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Aberdeen Asset Management Inc. ("Aberdeen" or
the "Sub-Advisor") and their respective representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust/Aberdeen Emerging Opportunity Fund (the "Fund") to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. When evaluating the information
included in this report, you are cautioned not to place undue reliance on these
forward-looking statements, which reflect the judgment of the Advisor and/or
Sub-Advisor and their respective representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's web page at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. It includes details about the Fund and presents data and analysis that
provide insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
First Trust and Aberdeen are just that: informed opinions. They should not be
considered to be promises or advice. The opinions, like the statistics, cover
the period through the date on the cover of this report. The material risks of
investing in the Fund are spelled out in the prospectus, the statement of
additional information, this report and other Fund regulatory filings.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
JUNE 30, 2017
Dear Shareholders:
First Trust Advisors L.P. ("First Trust") is pleased to provide you with this
semi-annual report which contains detailed information and the financial
statements for your investment in the First Trust/Aberdeen Emerging Opportunity
Fund (the "Fund"). We encourage you to read this report and discuss it with your
financial advisor.
Six months into the year, the bull market in stocks continues. President Donald
Trump's pro-growth, pro-U.S. policies, while slow in coming, have at least
created some optimism about the prospects for the U.S. economy, in our opinion.
From Donald Trump's election on November 8, 2016 through June 30, 2017, the S&P
500(R) Index (the "Index") posted a total return of 14.79%, according to
Bloomberg. The Index closed its June 19, 2017 trading session at an all-time
high of 2,453.46.
The current bull market (measuring from March 9, 2009 through June 30, 2017) is
the second longest in history. While we are optimistic about the U.S. economy,
we are also well aware that no one can predict the future or know how an
administration will affect markets and the economy in the future. Therefore, we
stress the importance of maintaining a long-term perspective, as we have done
since First Trust's inception over 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan through the Fund. We value our relationship with you and will continue our
relentless focus on bringing the types of investments that we believe could help
you reach your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
"AT A GLANCE"
AS OF JUNE 30, 2017 (UNAUDITED)
---------------------------------------------------------------------
FUND STATISTICS
---------------------------------------------------------------------
Symbol on New York Stock Exchange FEO
Common Share Price $16.06
Common Share Net Asset Value ("NAV") $17.59
Premium (Discount) to NAV (8.70)%
Net Assets Applicable to Common Shares $90,872,999
Current Quarterly Distribution per Common Share (1) $0.350
Current Annualized Distribution per Common Share $1.400
Current Distribution Rate on Common Share Price (2) 8.72%
Current Distribution Rate on NAV (2) 7.96%
---------------------------------------------------------------------
-----------------------------------------------
COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
-----------------------------------------------
Common Share Price NAV
6/16 $14.72 $16.78
14.91 16.88
14.73 16.88
15.10 17.19
14.96 17.10
7/16 15.32 17.24
15.44 17.45
15.80 17.71
15.79 17.70
8/16 15.40 17.44
15.77 17.49
15.55 17.46
15.32 17.29
15.06 17.36
9/16 15.22 17.28
15.26 17.37
15.13 17.16
15.32 17.35
10/16 15.05 17.20
14.75 16.95
13.58 16.18
13.53 16.04
11/16 13.85 16.08
13.71 16.01
14.02 16.42
14.03 16.25
13.67 15.92
12/16 13.90 16.16
14.11 16.32
14.23 16.45
14.30 16.47
1/17 14.55 16.74
14.72 16.92
14.78 17.05
14.97 17.12
2/17 15.16 17.19
14.97 17.19
14.88 17.09
15.40 17.58
15.24 17.35
3/17 15.26 17.26
15.39 17.28
15.90 17.32
16.12 17.38
4/17 16.20 17.59
16.09 17.59
16.38 17.78
16.30 17.64
5/17 16.39 17.87
16.68 17.99
16.59 18.01
16.31 17.99
16.30 17.56
6/17 16.06 17.59
----------------------------------------------------------------------------------------------------------
PERFORMANCE
----------------------------------------------------------------------------------------------------------
Average Annual Total Return
----------------------------------
6 Months 1 Year 5 Years 10 Years Inception
Ended Ended Ended Ended (08/28/06)
6/30/17 6/30/17 6/30/17 6/30/17 to 6/30/17
FUND PERFORMANCE (3)
NAV 13.76% 14.90% 4.37% 6.70% 7.90%
Market Value 20.75% 19.58% 4.81% 7.07% 6.54%
INDEX PERFORMANCE
Blended Index(4) 11.91% 12.43% 3.53% 4.95% 6.48%
Bloomberg Barclays Global Emerging Markets Index 5.82% 5.76% 5.03% 6.67% 6.91%
FTSE All World Emerging Market Index 14.77% 20.57% 4.28% 2.31% 5.49%
----------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------
% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
--------------------------------------------------------------------
Russian Federal Bond - Ofz (RUB), 7.05%, 1/19/28 4.8%
Turkey Government Bond (TRY), 10.4%, 3/20/24 3.8
Brazil Notas Do Tesouro Nacional Series F (BRL),
10%, 1/1/25 3.2
Mexican Bonos (MXN), 8.5%, 11/18/38 2.7
Samsung Electronics Co., Ltd., Preference Shares 2.7
Peruvian Government International Bond (PEN),
6.9%, 8/12/37 2.3
Housing Development Finance Corp. 1.8
Taiwan Semiconductor Manufacturing Co., Ltd. 1.8
Republic of South Africa Government Bond (ZAR),
6.25%, 3/31/36 1.8
AIA Group Ltd. 1.6
--------------------------------------------------------------------
Total 26.5%
======
-----------------------------------
% OF TOTAL
TOP 10 COUNTRIES(5) INVESTMENTS
-----------------------------------
Brazil 11.6%
India 7.7
Russia 7.7
Mexico 7.1
Turkey 7.1
South Africa 5.6
Indonesia 4.2
South Korea 4.0
Hong Kong 3.9
Argentina 3.6
-----------------------------------
Total 62.5%
======
(1) Most recent distribution paid or declared through 6/30/2017. 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 6/30/2017. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for NAV
returns and changes in Common Share Price for market value returns. Total
returns do not reflect sales load and are not annualized for periods of
less than one year. Past performance is not indicative of future results.
(4) Blended Index consists of the following: JPMorgan Emerging Markets Bond
Index - Global Diversified (32.5%); JPMorgan Government Bond Index -
Emerging Markets Diversified (32.5%); MSCI 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 sub-advisor.
Page 2
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
"AT A GLANCE" (CONTINUED)
AS OF JUNE 30, 2017 (UNAUDITED)
-----------------------------------------------------
% OF TOTAL
INDUSTRY CLASSIFICATION INVESTMENTS
-----------------------------------------------------
Sovereigns 42.5%
Banks 11.3
Wireless Telecommunications Services 3.2
Construction Materials 3.1
Real Estate Management & Development 3.1
Technology Hardware, Storage & Peripherals 2.7
Food & Staples Retailing 2.3
Integrated Oils 2.2
Oil, Gas & Consumable Fuels 2.2
Automobiles 2.1
Metals & Mining 2.0
Beverages 1.9
Semiconductors & Semiconductor Equipment 1.8
Thrifts & Mortgage Finance 1.8
Insurance 1.6
Tobacco 1.4
Multiline Retail 1.2
Pipeline 1.0
Internet Software & Services 0.9
IT Services 0.9
Household Products 0.8
Railroad 0.8
Exploration & Production 0.7
Hotels, Restaurants & Leisure 0.7
Transportation Infrastructure 0.7
Financial Services 0.6
Specialty Retail 0.6
Capital Markets 0.5
Energy Equipment & Services 0.5
Oil & Gas Services & Equipment 0.5
Personal Products 0.5
Pharmaceuticals 0.5
Utilities 0.5
Food Products 0.4
Consumer Discretionary 0.4
Chemicals 0.3
Communications Equipment 0.3
Construction Materials Manufacturing 0.3
Food & Beverage 0.3
Government Developmental Banks 0.3
Real Estate 0.3
Renewable Energy 0.2
Diversified Financial Services 0.1
Industrial Other 0.0*
-----------------------------------------------------
Total 100.0%
======
* Amount is less than 0.05%.
--------------------------------------------------------------------
% OF TOTAL
FIXED INCOME
CREDIT QUALITY(6) INVESTMENTS
--------------------------------------------------------------------
A 7.8%
A- 4.0
BBB 1.5
BBB- 30.4
BB+ 4.5
BB 11.8
BB- 6.6
B+ 9.9
B 10.1
B- 6.0
CCC+ 0.6
CCC 0.9
CCC- 0.2
NR 5.7
--------------------------------------------------------------------
Total 100.0%
======
(6) The credit quality and ratings information presented reflects the ratings
assigned by one or more nationally recognized statistical rating
organizations (NRSROs), including Standard & Poor's Rating Group, a
division of the McGraw-Hill Companies, Inc., Moody's Investors Service,
Inc., Fitch Ratings or a comparably rated NRSRO. For situations in which a
security is rated by more than one NRSRO and the ratings are not
equivalent, the highest ratings are used. The credit ratings shown relate
to the creditworthiness of the issuers of the underlying securities in the
Fund, and not to the Fund or its Shares. Credit ratings are subject to
change.
Page 3
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
SEMI-ANNUAL REPORT
JUNE 30, 2017 (UNAUDITED)
ADVISOR
First Trust Advisors L.P. ("First Trust") is the advisor to the First
Trust/Aberdeen Emerging Opportunity Fund (the "Fund"). 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 for the management of the Fund.
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 PLC"). The merger of
Standard Life plc and Aberdeen PLC, announced on March 6, 2017 ("Merger"),
closed on August 14, 2017. Aberdeen PLC became a direct subsidiary of Standard
Life plc as a result of the Merger and the combined company changed its name to
Standard Life Aberdeen plc. Shareholders of the Fund are not required to take
any action as a result of the Merger. Following the Merger, the Sub-Advisor is
an indirect subsidiary of Standard Life Aberdeen plc, but otherwise did not
change. The sub-advisory agreement, the services provided under the agreement,
and the fees charged for services did not change as a result of the Merger. The
portfolio management team did not change as a result of the Merger.
PORTFOLIO MANAGEMENT TEAM
Investment decisions for the Fund are made by Aberdeen using a team approach and
not by any one individual. By making team decisions, Aberdeen seeks to ensure
that the investment process results in consistent returns across all portfolios
with similar objectives. Aberdeen does not employ separate research analysts.
Instead, Aberdeen's investment managers combine analysis with portfolio
management. Each member of the team has sector and portfolio responsibilities
such as day-to-day monitoring of liquidity. The overall result of this matrix
approach is a high degree of cross-coverage, leading to a deeper understanding
of the securities in which Aberdeen invests. Below are the members of the team
with significant responsibility for the day-to-day management of the Fund's
portfolio.
EQUITY MANAGEMENT TEAM FIXED-INCOME MANAGEMENT TEAM
DEVAN KALOO BRETT DIMENT
Global Head of Equities Head of Global Emerging Market Debt
JOANNE IRVINE KEVIN DALY
Head of Emerging Markets ex Asia Senior Investment Manager, Emerging Market Debt
MARK GORDON-JAMES EDWIN GUTIERREZ
Senior Investment Manager, Global Emerging Markets Equity Head of Emerging Market Sovereign Debt
FIONA MANNING MAX WOLMAN
Senior Investment Manager, Global Emerging Markets Equity Senior Investment Manager, Emerging Market Debt
COMMENTARY
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
The investment objective of the Fund is to provide a high level of total return.
The Fund pursues its investment objective by investing at least 80% of its
managed assets in a diversified portfolio of equity and fixed-income securities
of issuers in emerging market countries. There can be no assurance that the
Fund's investment objective will be achieved, and the Fund may not be
appropriate for all investors.
FUND RECAP
The Fund had a net asset value ("NAV") total return(1) of 13.76% and a market
value total return of 20.75% for the six-months ended June 30, 2017, compared to
the Fund's blended index(2) total return of 11.91% over the same period. In
addition to the blended index, the Fund currently uses other indexes for
comparative purposes. The total returns for the six-months ended June 30, 2017,
for these indices were as follows: the Bloomberg Barclays Global Emerging
Markets Index was 5.82% and the FTSE All World Emerging Market Index was 14.77%.
-----------------------------
(1) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for NAV
returns and changes in Common Share Price for market value returns. Total
returns do not reflect sales load and are not annualized for periods of
less than one year. Past performance is not indicative of future results.
(2) Blended index consists of the following: JPMorgan Emerging Markets Bond
Index - Global Diversified (32.5%); JPMorgan Government Bond Index -
Emerging Markets Diversified (32.5%); MSCI Global Emerging Markets Index
(35.0%).
Page 4
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
SEMI-ANNUAL REPORT
JUNE 30, 2017 (UNAUDITED)
An important factor impacting the return of the Fund relative to its blended
index was the Fund's use of financial leverage through the use of bank
borrowings. The Fund uses leverage because its managers believe that, over time,
leverage provides opportunities for additional income and total return for
common shareholders. However, the use of leverage can also expose common
shareholders to additional volatility. For example, as the prices of securities
held by the Fund decline, the negative impact of the evaluation changes on
Common Share NAV and Common shareholder total return is magnified by the use of
leverage. Conversely, leverage may enhance Common Share returns during periods
when the prices of securities held by the Fund generally are rising. Unlike the
Fund, the Bloomberg Barclays Global Emerging Markets Index, the Bloomberg
Barclays Global Aggregate Index and the components of the blended index are not
leveraged. Leverage had a positive impact on the performance of the Fund over
this reporting period.
FIXED INCOME COMMENTARY
MARKET RECAP
Emerging market ("EM") debt enjoyed another promising period, posting its sixth
consecutive month of positive returns in May 2017 before the rally came to an
end in June. The strong run has surprised many, especially in the wake of
relatively subdued commodity prices and a third U.S. interest rate hike in as
many quarters. A dip in oil prices did put pressure on a number of EM credits,
however. Flows into the asset class remained strong, hitting 27 weeks of
consecutive inflows at the end of the period, while President Trump could do
little to dampen sentiment despite his 'America first' rhetoric. The U.S.
President's inability to push through various pro-growth policies since taking
office has been well documented, and is also benefitting EM debt, in our view.
In Europe, the political environment is looking much calmer following Emmanuel
Macron's sweeping victory in the French presidential elections. We believe that
he brings with him a renewed sense of optimism as the Eurozone economy begins to
gain some traction. The buoyant sentiment led to hawkish comments from the
European Central Bank (ECB) at its annual conference in late June, which
subsequently saw rates markets sell off aggressively and yield curves
steepening. EM central banks seem relatively unfazed by the more hawkish
developed markets ("DM") Central Bank rhetoric, however, instead preferring to
maintain their focus on progress at home. Additionally, low inflation in the
U.S. and Europe, as well as mixed U.S. economic data over the period, suggests
that DM central banks may be limited in their ability to raise rates too much
higher.
Over the period, the JP Morgan Emerging Markets Bond Index - Global Diversified
returned 6.19% while the blended index spread tightened by 32 basis points to
310 bps. High yield assets started the period strongly but it was investment
grade credits that outperformed thereafter, as commodity-linked credits suffered
amid the sustained pressure on oil prices. Mongolia and Belize were the top
performing credits in the first half of the period, with the latter negotiating
a debt restructuring with its bond creditors. The presidential election in
Ecuador and a Eurobond issue in Bolivia also caused these credits to
underperform, although Bolivia recovered in June. Venezuela bottomed the JP
Morgan EMBI Global Diversified Index at the end of the review period; the South
American nation continues to grapple with political strife and market concerns
over the government's ability to service its external Eurobond obligations.
Conversely, Cameroon, Pakistan, Namibia and Suriname performed relatively well
at the backend of the period.
In local currency debt, the JP Morgan Government Bond Index - Emerging Markets
Diversified (unhedged in USD terms) returned 10.68% with positive returns
witnessed in both local rates. Currencies also bolstered returns, despite coming
under pressure in June. Brazil began the year particularly well, with its
currency appreciating by 4% against the U.S. dollar in January. South Africa,
traditionally a bellwether of EM sentiment, was never far from the headlines.
President Jacob Zuma fired Finance Minister Pravin Gordhan after recalling
Gordhan from investor roadshows in the UK and the U.S. Gordhan was one of the
few well respected members of Zuma's cabinet and had made great efforts to
improve South Africa's debt sustainability during his tenure as Minister of
Finance. South Africa was downgraded to junk status as a result. Elsewhere,
Turkey was a notable performer in the second half of the review period; the
central bank tightened monetary conditions in order to contain inflation. The
Czech Republic was another stand out performer as it rallied by nearly 7% in May
2017 after entering the JP Morgan GBI-EM Diversified Index for the first time.
Other European countries including Hungary, Poland and Romania did well as they
tracked the Euro's appreciation against the U.S. dollar. In June 2017, Mexico
produced impressive returns from both its bond and currency.
PERFORMANCE ANALYSIS
The EM debt portion of the Fund outperformed the EM debt portion of its blended
index over the period under review. Country allocation and security selection
effects were both positive contributors, while currency exposure detracted from
the Fund. In hard currency debt, it benefitted from bond selection in Mexico and
zero-weights in China and the Philippines, while an overweight to Iraq was also
a positive contributor to performance. On the other side, an overweight to
Page 5
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
SEMI-ANNUAL REPORT
JUNE 30, 2017 (UNAUDITED)
Goergia, Brazil and Bahrain detracted from performance, as did bond selection in
Venezuela. In local currency debt, overweights to Brazil, Turkey, Russia and
Peru were the main contributors to the Fund's performance, while security
selection in South Africa was also beneficial. An underweight to eastern Europe,
specifically Poland, the Czech Republic and Hungary detracted from the Fund,
while exposure to the Dominican Republic also was a negative.
MARKET AND FUND OUTLOOK
The summer months have finally arrived and with them should bring a quieter
market - fewer new issues and reduced secondary market activity - as
participants take a well-earned break from what has been a rollercoaster first
half of 2017. Many of the key risks which were highlighted at the beginning of
the year have failed to materialize. This is mainly because U.S. President
Trump, despite his rampant Twitter rhetoric, has struggled to implement much of
his fiscal agenda. The market very quickly disregarded his posturing and focused
instead on the improved fundamental outlook for emerging markets, relatively
stable commodity prices and a quiet China ahead of the Party Congress meeting in
October. From an EM perspective, we believe the risks to focus on remain
external: U.S. or Eurozone monetary policy tightening, U.S. shale production's
impact on oil, renewed geopolitical tensions in both the Middle East and North
Korea, and/or the tightening of financial conditions in China.
EQUITY COMMENTARY
MARKET RECAP
Emerging market equities rose in the first half of 2017, buoyed by an improving
global economic outlook and continued inflows into the asset class. Currencies
broadly strengthened against the U.S. dollar, despite the U.S. Federal Reserve
("Fed") raising rates twice, as worries grew about U.S. President Trump's
ability to implement key pledges. However, oil prices fell as an Organization of
Petroleum Exporting Countries ("OPEC")-led agreement to extend output cuts
failed to assuage persistent oversupply concerns due to record U.S. shale
production.
Emerging Asia was robust. Chinese shares rose after MSCI's decision to add
A-shares into its indices from next year, though we view the move as largely
symbolic for now. Mainland authorities also continued efforts to curb financial
risk. Indian equities did well, bolstered by the ruling party's resounding state
election victory in Uttar Pradesh. However, its first quarter economic growth
slowed, as demonetization weighed on consumer demand. India also announced its
Goods and Service Tax rates ahead of its July rollout. While we expect near-term
disruptions, the tax should be neutral or marginally positive for our holdings
in the long-term.
Latin America also performed well. Mexico's economy grew steadily in the first
quarter, while the peso erased its post-U.S. election losses. The country's
central bank also continued raising rates to tame inflation. However, Brazilian
equities fell, as the stockmarket suffered its worst one-day decline since 2008
after President Michel Temer became embroiled in a corruption scandal. He was
later accused of involvement in corruption following the testimony of Brazilian
meatpacker JBS's controller, Joesley Batista, with investors concerned over the
future of his reform program. Chile's central bank also trimmed key interest
rates for the first time since 2014, as economic growth faltered and inflation
fell to its lowest in three years.
In Europe, the Middle East and Africa ("EMEA"), Russian equities were pressured
by retreating oil prices, as well as fading hopes that a Trump presidency would
spell an end to sanctions. Elsewhere, South Africa slipped into recession, amid
a political crisis as President Jacob Zuma survived an internal no-confidence
vote after he fired Finance Minister Pravin Gordhan. Turkey bucked the trend, as
its stocks and currency strengthened after President Erdogan controversially won
sweeping new powers in a referendum. Its economy also grew at its fastest pace
in almost two years.
PERFORMANCE ANALYSIS
The equity portion of the Fund had a net asset value ("NAV") total return of
18.43% for the six months ended June 30, 2017, compared to the Fund's equity
benchmark MSCI Global Emerging Markets Index's total return of 18.61% over the
same period.
The Fund marginally underperformed equity portion of the benchmark. Asset
allocation was negative, but stock selection was positive.
In Latin America, stock selection in Mexico buoyed performance, as full-service
bank Banorte, conglomerate Fomento Economico Mexicano, S.A.B. de C.V ("FEMSA")
and airport operator OMA posted sound results. In Brazil, stock selection was
positive. The Fund's holdings largely proved more resilient than the broader
market, which sold off due to the corruption scandal involving President Temer.
However food producer, BRF was pressured by an investigation that led some
Page 6
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
SEMI-ANNUAL REPORT
JUNE 30, 2017 (UNAUDITED)
countries to temporarily suspend Brazilian meat imports, as well as ongoing
weakness in the domestic market and poor performance in its international
division. The Fund's off-benchmark position in Argentine pipe producer Tenaris
also detracted following weak results.
In EMEA, the overweight to Turkey boosted relative performance, as both the
market and currency rallied. The lack of exposure to Qatar also benefited, amid
heightened geopolitical concerns. Conversely, Russia was a modest detractor,
with retailer Magnit among the worst-performing stocks amid investor concerns
over falling returns and cash flow generation. Lukoil also hurt performance as
oil prices fell, although this was partially mitigated by the Fund's lack of
exposure to Gazprom.
Performance in Asia was mixed. Stock selection in India was a key driver of
regional outperformance. Cement company Grasim Industries continued to gain on
expectations for its restructuring, mortgage lender HDFC was boosted by the
government's housing loan subsidy plan, while cigarette-maker ITC benefited from
the Goods and Services Tax Council's decision to leave rates unchanged for
tobacco. By contrast, the underweight to China was the largest detractor, as
shares rallied after MSCI's decision to include A-shares in its indices, while
not holding internet giants Alibaba Group and Tencent Holdings Limited also
proved costly. The underweight to Korea also weighed on performance, further
compounded by negative stock selection.
MARKET OUTLOOK
Following a good first half-year, emerging markets are likely to stay resilient,
supported by expectations for the global recovery to continue. However, some
uncertainties remain. For instance, India's GST implementation will likely
disrupt consumers and companies over the next few quarters, although we still
view it as a long-term positive. Brazil's deepening political crisis could
destabilize its economy, while Russia may be further hurt if oil prices keep
sliding. A slowdown in China could also cloud the encouraging outlook.
Nevertheless, previous challenges appear to be easing. Since 2013's 'taper
tantrum', many developing economies have improved their external balances,
putting them in a better fiscal position to weather a likely tightening cycle in
the U.S., including future rate hikes. A moderating U.S. dollar, after a
six-year rally, could provide another boost. Meanwhile, recent data from China
also gives some cause for optimism that its economy is stabilising. Moreover, we
remain confident that our well-managed holdings will be able to withstand
short-term volatility, and continue to benefit from the broad pickup in growth
and earnings. The positive prospects are underpinned by still-attractive
valuations, with EM assets considerably cheaper than their developed market
peers.
Page 7
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a)
JUNE 30, 2017 (UNAUDITED)
SHARES DESCRIPTION VALUE
-------------- ----------------------------------------------------------------------------------------- ------------
COMMON STOCKS - 45.2%
BRAZIL - 5.4%
97,350 Ambev S.A................................................................................ $ 540,392
122,761 Banco Bradesco S.A., ADR................................................................. 1,043,468
31,800 BRF S.A.................................................................................. 375,507
90,200 Lojas Renner S.A......................................................................... 748,740
27,554 Multiplan Empreendimentos Imobiliarios S.A., Preference Shares........................... 542,946
41,267 Ultrapar Participacoes S.A............................................................... 975,341
59,604 Vale S.A., ADR........................................................................... 521,535
19,642 Vale S.A., Preference Shares, ADR........................................................ 160,082
------------
4,908,011
------------
CHILE - 1.0%
19,459 Banco Santander Chile S.A., ADR.......................................................... 494,453
50,382 SACI Falabella........................................................................... 412,619
------------
907,072
------------
CHINA - 2.5%
124,000 China Mobile Ltd......................................................................... 1,315,846
472,000 PetroChina Co., Ltd., Class H............................................................ 288,975
17,700 YUM China Holdings, Inc.................................................................. 697,911
------------
2,302,732
------------
HONG KONG - 3.8%
206,000 AIA Group Ltd............................................................................ 1,505,267
211,000 Hang Lung Group Ltd...................................................................... 872,923
16,452 Hong Kong Exchanges and Clearing Ltd..................................................... 425,237
242,000 Swire Pacific Ltd., B Shares............................................................. 423,406
54,600 Swire Properties Ltd..................................................................... 180,078
------------
3,406,911
------------
HUNGARY - 0.6%
19,000 Richter Gedeon Nyrt...................................................................... 496,551
------------
INDIA - 8.0%
61,010 Grasim Industries Ltd.................................................................... 1,172,393
11,737 Hero MotoCorp Ltd........................................................................ 672,098
47,000 Hindustan Unilever Ltd................................................................... 785,012
69,500 Housing Development Finance Corp., Ltd................................................... 1,736,438
25,040 Infosys Ltd.............................................................................. 362,424
260,259 ITC Ltd.................................................................................. 1,303,157
27,500 Kotak Mahindra Bank Ltd.................................................................. 406,623
13,902 Tata Consultancy Services Ltd............................................................ 508,086
5,428 UltraTech Cement Ltd..................................................................... 332,469
------------
7,278,700
------------
INDONESIA - 2.4%
1,902,700 Astra International Tbk PT............................................................... 1,273,193
306,300 Bank Central Asia Tbk PT................................................................. 417,463
375,400 Indocement Tunggal Prakarsa Tbk PT....................................................... 518,562
------------
2,209,218
------------
ITALY - 0.5%
15,600 Tenaris S.A., ADR........................................................................ 485,784
------------
MALAYSIA - 0.6%
105,000 Public Bank Bhd.......................................................................... 497,036
------------
Page 8 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
JUNE 30, 2017 (UNAUDITED)
SHARES DESCRIPTION VALUE
-------------- ----------------------------------------------------------------------------------------- ------------
COMMON STOCKS (CONTINUED)
MEXICO - 3.4%
12,300 Fomento Economico Mexicano, S.A.B. de C.V., ADR.......................................... $ 1,209,582
14,000 Grupo Aeroportuario del Centro Norte, S.A.B. de C.V., ADR................................ 674,520
190,200 Grupo Financiero Banorte, S.A.B. de C.V., O Shares....................................... 1,206,779
------------
3,090,881
------------
PHILIPPINES - 1.8%
1,189,000 Ayala Land, Inc.......................................................................... 936,638
325,359 Bank of the Philippine Islands........................................................... 670,577
------------
1,607,215
------------
POLAND - 0.4%
11,696 Bank Pekao S.A........................................................................... 393,901
------------
PORTUGAL - 0.5%
23,692 Jeronimo Martins SGPS S.A................................................................ 462,453
------------
RUSSIA - 1.7%
16,000 Lukoil PJSC, ADR......................................................................... 780,640
5,096 Magnit PJSC.............................................................................. 793,239
------------
1,573,879
------------
SOUTH AFRICA - 1.7%
18,000 BHP Billiton PLC......................................................................... 274,709
40,910 Massmart Holdings Ltd.................................................................... 329,907
45,215 MTN Group Ltd............................................................................ 394,346
94,763 Truworths International Ltd.............................................................. 517,910
------------
1,516,872
------------
SOUTH KOREA - 4.2%
1,020 Amorepacific Corp........................................................................ 165,817
2,341 Amorepacific Group....................................................................... 265,988
1,136 NAVER Corp............................................................................... 832,031
1,550 Samsung Electronics Co., Ltd. (Preference Shares)........................................ 2,522,484
------------
3,786,320
------------
TAIWAN - 2.3%
108,005 Taiwan Mobile Co., Ltd................................................................... 406,528
251,954 Taiwan Semiconductor Manufacturing Co., Ltd.............................................. 1,726,903
------------
2,133,431
------------
THAILAND - 2.0%
61,200 Siam Cement (The) PCL.................................................................... 904,398
201,100 Siam Commercial Bank Public Co., Ltd. (b)................................................ 920,549
------------
1,824,947
------------
TURKEY - 1.9%
179,135 Akbank TAS............................................................................... 498,947
32,444 BIM Birlesik Magazalar A.S............................................................... 601,677
43,150 Haci Omer Sabanci Holding A.S............................................................ 134,044
165,000 Turkiye Garanti Bankasi A.S.............................................................. 459,109
------------
1,693,777
------------
UNITED KINGDOM - 0.5%
42,739 Standard Chartered PLC (c)............................................................... 432,634
------------
TOTAL COMMON STOCKS...................................................................... 41,008,325
(Cost $29,763,715) ------------
See Notes to Financial Statements Page 9
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
JUNE 30, 2017 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- ------------------------------------------------------------- ---------- -------------- ------------
FOREIGN SOVEREIGN BONDS AND NOTES - 44.4%
ARGENTINA - 3.6%
2,105,000 Argentine Bonos del Tesoro (ARS)............................. 18.20% 10/03/21 $ 134,936
22,660,000 Argentine Bonos del Tesoro (ARS)............................. 16.00% 10/17/23 1,472,465
400,000 Argentine Republic Government International Bond (USD)....... 7.50% 04/22/26 432,000
426,000 Argentine Republic Government International Bond (USD)....... 5.63% 01/26/22 437,289
266,387 Argentine Republic Government International Bond (USD)....... 8.28% 12/31/33 292,360
464,000 Argentine Republic Government International Bond (USD)....... 7.13% 07/06/36 461,680
------------
3,230,730
------------
BAHRAIN - 0.3%
278,000 Bahrain Government International Bond (USD) (d).............. 7.00% 10/12/28 282,090
------------
BRAZIL - 3.9%
10,400,000 Brazil Notas do Tesouro Nacional, Series F (BRL)............. 10.00% 01/01/25 3,074,756
1,560,000 Brazil Notas do Tesouro Nacional, Series F (BRL)............. 10.00% 01/01/27 458,986
------------
3,533,742
------------
COSTA RICA - 0.3%
300,000 Costa Rica Government International Bond (USD)............... 4.25% 01/26/23 293,625
------------
DOMINICAN REPUBLIC - 1.2%
53,000,000 Dominican Republic Bond (DOP) (d)............................ 10.50% 04/07/23 1,126,914
------------
ECUADOR - 1.5%
230,000 Ecuador Government International Bond (USD) (d).............. 8.75% 06/02/23 227,125
1,100,000 Ecuador Government International Bond (USD).................. 9.65% 12/13/26 1,104,070
------------
1,331,195
------------
EGYPT - 0.5%
246,000 Egypt Government International Bond (USD) (d)................ 6.13% 01/31/22 251,710
200,000 Egypt Government International Bond (USD) (d)................ 8.50% 01/31/47 216,108
------------
467,818
------------
EL SALVADOR - 0.3%
300,000 El Salvador Government International Bond (USD).............. 7.65% 06/15/35 281,820
------------
ETHIOPIA - 0.9%
790,000 Ethiopia International Bond (USD) (d)........................ 6.63% 12/11/24 785,082
------------
GHANA - 0.9%
2,150,000 Ghana Government Bond (GHS).................................. 21.50% 03/09/20 523,050
300,000 Ghana Government International Bond (USD).................... 8.13% 01/18/26 306,863
------------
829,913
------------
HONDURAS - 0.5%
410,000 Honduras Government International Bond (USD) (d)............. 7.50% 03/15/24 455,613
------------
HUNGARY - 1.4%
276,800,000 Hungary Government Bond (HUF)................................ 5.50% 06/24/25 1,230,860
------------
INDONESIA - 1.9%
470,000 Indonesia Government International Bond (USD) (d)............ 5.88% 01/15/24 537,530
14,700,000,000 Indonesia Treasury Bond (IDR)................................ 8.38% 03/15/34 1,189,567
------------
1,727,097
------------
IRAQ - 0.6%
610,000 Iraq International Bond (USD)................................ 5.80% 01/15/28 543,497
------------
Page 10 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
JUNE 30, 2017 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- ------------------------------------------------------------- ---------- -------------- ------------
FOREIGN SOVEREIGN BONDS AND NOTES (CONTINUED)
IVORY COAST - 0.4%
330,995 Ivory Coast Government International Bond (USD).............. 5.75% 12/31/32 $ 318,790
------------
KENYA - 0.2%
200,000 Kenya Government International Bond (USD).................... 6.88% 06/24/24 204,988
------------
MEXICO - 2.9%
41,200,000 Mexican Bonos (MXN).......................................... 8.50% 11/18/38 2,598,912
------------
MONGOLIA - 0.3%
290,000 Mongolia Government International Bond (USD)................. 5.13% 12/05/22 273,100
------------
NIGERIA - 0.2%
200,000 Nigeria Government International Bond (USD) (d).............. 7.88% 02/16/32 217,508
------------
PERU - 2.4%
6,320,000 Peruvian Government International Bond (PEN)................. 6.90% 08/12/37 2,137,591
------------
POLAND - 1.5%
4,800,000 Republic of Poland Government Bond (PLN)..................... 4.00% 10/25/23 1,379,450
------------
RUSSIA - 5.3%
281,300,000 Russian Federal Bond - OFZ (RUB)............................. 7.05% 01/19/28 4,544,444
200,000 Russian Foreign Bond - Eurobond (USD)........................ 5.88% 09/16/43 224,633
------------
4,769,077
------------
RWANDA - 0.6%
200,000 Rwanda International Government Bond (USD) (d)............... 6.63% 05/02/23 206,500
300,000 Rwanda International Government Bond (USD)................... 6.63% 05/02/23 309,750
------------
516,250
------------
SENEGAL - 0.7%
200,000 Senegal Government International Bond (USD) (d)............. 6.25% 05/23/33 203,503
380,000 Senegal Government International Bond (USD).................. 8.75% 05/13/21 434,794
------------
638,297
------------
SOUTH AFRICA - 4.1%
14,400,000 Republic of South Africa Government Bond (ZAR)............... 10.50% 12/21/26 1,222,005
31,500,000 Republic of South Africa Government Bond (ZAR)............... 6.25% 03/31/36 1,703,959
820,000 Republic of South Africa Government International Bond
(USD)..................................................... 4.88% 04/14/26 823,766
------------
3,749,730
------------
SRI LANKA - 0.6%
570,000 Sri Lanka Government International Bond (USD) (d)............ 6.20% 05/11/27 570,518
------------
SURINAME - 0.3%
270,000 Republic of Suriname (USD) (d)............................... 9.25% 10/26/26 278,100
------------
TANZANIA - 0.2%
200,001 Tanzania Government International Bond (USD) (e)............. 7.42% 03/09/20 209,941
------------
TURKEY - 4.9%
339,000 Hazine Mustesarligi Varlik Kiralama AS (USD) (d)............. 5.00% 04/06/23 346,292
1,750,000 Turkey Government Bond (TRY)................................. 6.30% 02/14/18 484,695
12,650,000 Turkey Government Bond (TRY)................................. 10.40% 03/20/24 3,625,893
------------
4,456,880
------------
See Notes to Financial Statements Page 11
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
JUNE 30, 2017 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- ------------------------------------------------------------- ---------- -------------- ------------
FOREIGN SOVEREIGN BONDS AND NOTES (CONTINUED)
UKRAINE - 1.1%
115,000 Ukraine Government International Bond (USD) (d).............. 7.75% 09/01/21 $ 117,050
865,000 Ukraine Government International Bond (USD) (d).............. 7.75% 09/01/24 850,094
188,000 Ukraine Government International Bond (USD) (d).............. (f) 05/31/40 73,636
------------
1,040,780
------------
URUGUAY - 0.4%
190,000 Uruguay Government International Bond (USD).................. 4.38% 10/27/27 202,825
5,257,000 Uruguay Government International Bond (UYU) (d).............. 9.88% 06/20/22 189,542
------------
392,367
------------
VENEZUELA - 0.5%
1,050,000 Venezuela Government Inernational Bond (USD)................. 9.25% 05/07/28 468,562
------------
TOTAL FOREIGN SOVEREIGN BONDS AND NOTES................................................. 40,340,837
(Cost $39,263,774) ------------
FOREIGN CORPORATE BONDS AND NOTES (g) - 14.8%
ARGENTINA - 0.2%
200,000 Genneia S.A. (USD) (d)....................................... 8.75% 01/20/22 213,164
------------
AZERBAIJAN - 0.6%
495,000 Southern Gas Corridor CJSC (USD) (d)......................... 6.88% 03/24/26 537,174
------------
BANGLADESH - 0.3%
250,000 Banglalink Digital Communications Ltd. (USD) (d)............. 8.63% 05/06/19 262,500
------------
BARBADOS - 0.3%
250,000 Sagicor Finance 2015 Ltd. (USD) (d).......................... 8.88% 08/11/22 280,625
------------
BRAZIL - 2.8%
350,000 OAS Finance Ltd. (USD) (h) (i) (j) (k)....................... 8.88% (l) 19,250
200,000 OAS Investments GmbH (USD) (h) (j) (k)....................... 8.25% 10/19/19 11,000
795,000 Petrobras Global Finance BV (USD)............................ 5.38% 01/27/21 810,264
170,000 Petrobras Global Finance BV (USD)............................ 8.38% 05/23/21 190,720
650,000 Petrobras Global Finance BV (USD)............................ 8.75% 05/23/26 749,125
206,088 QGOG Atlantic/Alaskan Rigs Ltd. (USD)........................ 5.25% 07/30/18 201,451
370,000 QGOG Constellation S.A. (USD)................................ 6.25% 11/09/19 267,325
300,000 Vale Overseas Ltd. (USD)..................................... 6.88% 11/21/36 323,250
------------
2,572,385
------------
COLOMBIA - 0.2%
207,000 Banco GNB Sudameris S.A. (USD) (d) (i)....................... 6.50% 04/03/27 214,245
------------
DOMINICAN REPUBLIC - 0.6%
460,000 AES Andres BV/Dominican Power Partners/Empresa
Generadora de Electricidad Itabo (USD) (d)................ 7.95% 05/11/26 500,701
------------
EL SALVADOR - 0.4%
310,000 Grupo Unicomer Co., Ltd. (USD) (d)........................... 7.88% 04/01/24 334,087
------------
GEORGIA - 1.5%
200,000 BGEO Group JSC (USD) (d)..................................... 6.00% 07/26/23 203,800
350,000 Georgian Oil and Gas Corp. JSC (USD) (d)..................... 6.75% 04/26/21 367,500
680,000 Georgian Railway JSC (USD)................................... 7.75% 07/11/22 750,024
------------
1,321,324
------------
GUATEMALA - 0.5%
400,000 Comcel Trust via Comunicaciones Celulares S.A. (USD) (d)..... 6.88% 02/06/24 427,560
------------
Page 12 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
JUNE 30, 2017 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- ------------------------------------------------------------- ---------- -------------- ------------
FOREIGN CORPORATE BONDS AND NOTES (g) (CONTINUED)
HONG KONG - 0.3%
260,000 Shimao Property Holdings Ltd. (USD).......................... 8.38% 02/10/22 $ 286,486
------------
KAZAKHSTAN - 0.7%
308,000 Tengizchevroil Finance Co. International Ltd. (USD) (d)...... 4.00% 08/15/26 297,667
375,000 Zhaikmunai LLP (USD) (d)..................................... 7.13% 11/13/19 380,852
------------
678,519
------------
MEXICO - 1.2%
270,000 Alfa SAB de CV (USD)......................................... 6.88% 03/25/44 295,650
230,000 Cemex SAB de CV (USD) (d).................................... 7.75% 04/16/26 263,637
4,800,000 Petroleos Mexicanos (MXN).................................... 7.19% 09/12/24 239,964
270,000 Unifin Financiera SAB de CV SOFOM ENR (USD) (d).............. 7.25% 09/27/23 277,560
------------
1,076,811
------------
NETHERLANDS - 0.2%
200,000 GTH Finance BV (USD) (d)..................................... 7.25% 04/26/23 221,125
------------
NIGERIA - 1.2%
290,000 Access Bank PLC (USD) (d).................................... 10.50% 10/19/21 313,565
290,000 IHS Netherlands Holdco BV (USD) (d).......................... 9.50% 10/27/21 296,860
270,000 United Bank for Africa PLC (USD) (d)......................... 7.75% 06/08/22 261,461
200,000 Zenith Bank PLC (USD) (d).................................... 7.38% 05/30/22 196,340
------------
1,068,226
------------
PARAGUAY - 0.4%
350,000 Banco Regional SAECA (USD) (d)............................... 8.13% 01/24/19 373,275
------------
RUSSIA - 1.0%
280,000 Credit Bank of Moscow Via CBOM Finance PLC (USD) (d) (i)..... 7.50% 10/05/27 278,193
394,000 Evraz Group S.A. (USD) (d)................................... 5.38% 03/20/23 395,675
237,000 Polyus Finance PLC (USD) (d)................................. 5.25% 02/07/23 243,612
------------
917,480
------------
TURKEY - 0.7%
288,000 Turkiye Vakiflar Bankasi TAO (USD)........................... 6.00% 11/01/22 286,030
300,000 Yasar Holdings AS (USD) (d).................................. 8.88% 05/06/20 310,127
------------
596,157
------------
UKRAINE - 0.3%
280,000 Ukreximbank Via Biz Finance PLC (USD)........................ 9.63% 04/27/22 289,538
------------
UNITED KINGDOM - 1.3%
22,300,000 HSBC Bank PLC (EGP) (d)...................................... (f) 09/21/17 1,175,796
------------
VENEZUELA - 0.1%
340,000 Petroleos de Venezuela S.A. (USD)............................ 6.00% 05/16/24 128,010
------------
TOTAL FOREIGN CORPORATE BONDS AND NOTES.................................................. 13,475,188
(Cost $13,326,733) ------------
TOTAL INVESTMENTS - 104.4%............................................................... 94,824,350
(Cost $82,354,222) (m)
OUTSTANDING LOANS - (6.4%)............................................................... (5,800,000)
NET OTHER ASSETS AND LIABILITIES - 2.0%.................................................. 1,848,649
------------
NET ASSETS - 100.0%...................................................................... $ 90,872,999
============
See Notes to Financial Statements Page 13
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2017 (UNAUDITED)
-----------------------------
(a) All of these securities are available to serve as collateral for the
outstanding loans.
(b) This security is fair valued by the Advisor's Pricing Committee in
accordance with procedures adopted by the Fund's Board of Trustees and in
accordance with provisions of the Investment Company Act of 1940, as
amended. At June 30, 2017, securities noted as such are valued at $920,549
or 1.0% of net assets.
(c) Non-income producing security.
(d) This security, sold within the terms of a private placement memorandum, is
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended (the "1933 Act"), and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Pursuant to
procedures adopted by the Fund's Board of Trustees, this security has been
determined to be liquid by the Aberdeen Asset Management Inc. (the
"Sub-Advisor"). At June 30, 2017, securities noted as such amounted to
$15,562,016 or 17.1% of net assets.
(e) Floating rate security. The interest rate shown reflects the rate in
effect at June 30, 2017.
(f) Zero coupon bond.
(g) Portfolio securities are included in a country based upon their underlying
credit exposure as determined by the Sub-Advisor.
(h) This issuer is in default and interest is not being accrued by the Fund
nor paid by the issuer.
(i) Fixed-to-floating or fixed-to-variable rate security. The interest rate
shown reflects the fixed rate in effect at June 30, 2017. At a
predetermined date, the fixed rate will change to a floating rate or a
variable rate.
(j) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A of the 1933 Act, and
may be resold in transactions exempt from registration normally to
qualified institutional buyers. (see Note 2F - Restricted Securities in
the Notes to Financial Statements).
(k) This issuer has filed for bankruptcy protection in a Sao Paulo state
court.
(l) Perpetual maturity.
(m) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of June 30, 2017, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $17,198,935 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $4,728,807.
ADR American Depositary Receipt
Currency Abbreviations
ARS Argentine Peso
BRL Brazilian Real
CLP Chilean Peso
DOP Dominican Peso
EGP Egyptian Pound
EUR Euro
GBP British Pound Sterling
GHS Ghanaian Cedi
HKD Hong Kong Dollar
HUF Hungarian Forint
IDR Indonesian Rupiah
INR Indian Rupee
KRW South Korean Won
MXN Mexican Peso
MYR Malaysian Ringgit
PEN Peruvian New Sol
PHP Philippines Peso
PLN Polish Zloty
RUB Russian Ruble
THB Thailand Baht
TRY Turkish Lira
TWD Taiwan New Dollar
USD United States Dollar
UYU Uruguayan Peso
ZAR South African Rand
Page 14 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2017 (UNAUDITED)
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of June 30, 2017
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
6/30/2017 PRICES INPUTS INPUTS
------------ ------------ -------------- ------------
Common Stocks:
Indonesia..................................... $ 2,209,218 $ -- $ 2,209,218 $ --
Thailand...................................... 1,824,947 904,398 920,549 --
Other Country Categories*..................... 36,974,160 36,974,160 -- --
------------ ------------ -------------- ------------
Total Common Stocks................................ 41,008,325 37,878,558 3,129,767 --
------------ ------------ -------------- ------------
Foreign Sovereign Bonds and Notes*................. 40,340,837 -- 40,340,837 --
Foreign Corporate Bonds and Notes*................. 13,475,188 -- 13,475,188 --
------------ ------------ -------------- ------------
Total Investments.................................. $ 94,824,350 $ 37,878,558 $ 56,945,792 $ --
------------ ------------ -------------- ------------
Forward Foreign Currency Contracts**............... 85,232 -- 85,232 --
------------ ------------ -------------- ------------
Total.............................................. $ 94,909,582 $ 37,878,558 $ 57,031,024 $ --
============ ============ ============== ============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
6/30/2017 PRICES INPUTS INPUTS
------------ ------------ -------------- ------------
Forward Foreign Currency Contracts**............... $ (7,495) $ -- $ (7,495) $ --
============ ============ ============== ============
* See Portfolio of Investments for country breakout.
** See the Forward Foreign Currency Contracts table for contract and currency
detail.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. As of June 30,
2017, the Fund transferred common stocks valued at $1,791,755 from Level 1 to
Level 2 of the fair value hierarchy. The common stocks that transferred from
Level 1 to Level 2 did so as a result of the common stocks being priced based on
the June 29, 2017 local exchange closing price, as the local exchange was closed
for holiday on June 30, 2017. For the December 31, 2016 shareholder report,
these common stocks were valued using the local exchange closing price on that
date.
See Notes to Financial Statements Page 15
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2017 (UNAUDITED)
FORWARD FOREIGN CURRENCY CONTRACTS (SEE NOTE 2C - FORWARD FOREIGN CURRENCY
CONTRACTS IN THE NOTES TO FINANCIAL STATEMENTS):
FORWARD FOREIGN CURRENCY CONTRACTS
-------------------------------------------------------------
PURCHASE SALE UNREALIZED
SETTLEMENT AMOUNT AMOUNT VALUE AS OF VALUE AS OF APPRECIATION
DATE COUNTERPARTY PURCHASED (a) SOLD (a) 6/30/2017 6/30/2017 (DEPRECIATION)
------------ ------------ --------------------- ------------------- ----------------- ----------------- --------------
7/14/2017 JPM USD 844,252 ZAR 11,063,000 $ 844,252 $ 842,895 $ 1,357
8/23/2017 CIT INR 32,218,000 USD 497,652 494,961 497,652 (2,690)
8/23/2017 CIT USD 1,087,986 EGP 20,074,000 1,087,986 1,090,268 (2,282)
8/23/2017 GS RUB 160,493,000 USD 2,692,474 2,689,951 2,692,474 (2,523)
8/23/2017 CIT USD 1,117,288 RUB 64,596,000 1,117,288 1,082,665 34,623
8/23/2017 CIT USD 1,656,538 RUB 95,897,000 1,656,538 1,607,286 49,252
--------------
Net Unrealized Appreciation (Depreciation) ................................................................. $ 77,737
==============
(a) See Portfolio of Investments for currency descriptions.
See Note 2D - Offsetting on the Statement of Assets and Liabilities in the Notes
to Financial Statements for a table that presents the forward foreign currency
contracts' assets and liabilities on a gross basis.
Counterparty Abbreviations:
CIT Citibank, NA
GS Goldman Sachs
JPM JPMorgan Chase
CURRENCY EXPOSURE % OF TOTAL
DIVERSIFICATION INVESTMENTS +
--------------------------------------------------
USD 34.7%
INR 8.2
BRL 7.1
TRY 6.1
RUB 5.6
HKD 5.3
MXN 4.3
KRW 4.0
ZAR 3.8
IDR 3.6
PEN 2.2
TWD 2.2
PLN 1.9
THB 1.9
HUF 1.8
ARS 1.7
PHP 1.7
DOP 1.2
EUR 0.5
GBP 0.5
GHS 0.5
MYR 0.5
CLP 0.4
UYU 0.2
EGP 0.1
--------------------------------------------------
Total 100.0%
======
+ The weightings include the impact of currency forwards.
Page 16 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2017 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $82,354,222).......................................................................... $ 94,824,350
Cash........................................................................................... 833,382
Foreign currency (Cost $273,320)............................................................... 273,139
Unrealized appreciation on forward foreign currency contracts.................................. 85,232
Receivables:
Interest.................................................................................... 1,127,284
Investment securities sold.................................................................. 366,950
Dividends................................................................................... 115,793
Miscellaneous............................................................................... 40,381
Dividend reclaims........................................................................... 9,993
Prepaid expenses............................................................................... 14,170
------------
Total Assets................................................................................ 97,690,674
------------
LIABILITIES:
Outstanding loan............................................................................... 5,800,000
Unrealized depreciation on forward foreign currency contracts.................................. 7,495
Payables:
Investment securities purchased............................................................. 602,811
Deferred foreign capital gains tax.......................................................... 136,068
Investment advisory fees.................................................................... 80,606
Due to broker............................................................................... 65,233
Custodian fees.............................................................................. 49,591
Audit and tax fees.......................................................................... 39,939
Transfer agent fees......................................................................... 19,648
Legal fees.................................................................................. 5,655
Printing fees............................................................................... 2,411
Interest and fees on loan................................................................... 1,507
Financial reporting fees.................................................................... 771
Administrative fees......................................................................... 199
Trustees' fees and expenses................................................................. 178
Other liabilities.............................................................................. 5,563
------------
Total Liabilities........................................................................... 6,817,675
------------
NET ASSETS..................................................................................... $ 90,872,999
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $ 79,182,072
Par value...................................................................................... 51,670
Accumulated net investment income (loss)....................................................... (1,811,692)
Accumulated net realized gain (loss) on investments, forward foreign currency
contracts and foreign currency transactions................................................. 1,060,405
Net unrealized appreciation (depreciation) on investments, forward foreign
currency contracts and foreign currency translation......................................... 12,390,544
------------
NET ASSETS..................................................................................... $ 90,872,999
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)........................... $ 17.59
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 5,167,040
============
See Notes to Financial Statements Page 17
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2017 (UNAUDITED)
INVESTMENT INCOME:
Interest (net of foreign withholding tax of $4,187)............................................ $ 2,189,211
Dividends (net of foreign withholding tax of $67,271).......................................... 572,524
------------
Total investment income..................................................................... 2,761,735
------------
EXPENSES:
Investment advisory fees....................................................................... 471,688
Custodian fees................................................................................. 100,807
Interest and fees on loan...................................................................... 55,020
Administrative fees............................................................................ 37,561
Audit and tax fees............................................................................. 34,107
Legal fees..................................................................................... 18,837
Transfer agent fees............................................................................ 17,420
Printing fees.................................................................................. 16,342
Trustees' fees and expenses.................................................................... 8,549
Financial reporting fees....................................................................... 4,625
Other.......................................................................................... 14,503
------------
Total expenses.............................................................................. 779,459
------------
NET INVESTMENT INCOME (LOSS)................................................................... 1,982,276
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments................................................................................. 1,624,912
Forward foreign currency contracts.......................................................... (99,790)
Foreign currency transactions............................................................... (35,922)
Foreign capital gains tax................................................................... (16,378)
------------
Net realized gain (loss)....................................................................... 1,472,822
------------
Net increase from payment by the sub-advisor................................................... 5,000
------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................................. 7,412,231
Forward foreign currency contracts.......................................................... 143,398
Foreign currency translation................................................................ (17,557)
Deferred foreign capital gains tax.......................................................... (9,584)
------------
Net change in unrealized appreciation (depreciation)........................................... 7,528,488
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ 9,006,310
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 10,988,586
============
Page 18 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
6/30/2017 ENDED
(UNAUDITED) 12/31/2016
------------- -------------
OPERATIONS:
Net investment income (loss)...................................................... $ 1,982,276 $ 3,430,001
Net realized gain (loss).......................................................... 1,472,822 (514,555)
Net increase from payment by the sub-advisor...................................... 5,000 --
Net change in unrealized appreciation (depreciation).............................. 7,528,488 8,443,287
------------- -------------
Net increase (decrease) in net assets resulting from operations................... 10,988,586 11,358,733
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................. (3,616,928) (1,585,053)
Net realized gain................................................................. -- (1,815,234)
Return of capital................................................................. -- (3,931,866)
------------- -------------
Total distributions to shareholders............................................... (3,616,928) (7,332,153)
------------- -------------
CAPITAL TRANSACTIONS:
Repurchase of Common Shares....................................................... (177,758) (1,492,344)
------------- -------------
Net increase (decrease) in net assets resulting from capital transactions......... (177,758) (1,492,344)
------------- -------------
Total increase (decrease) in net assets........................................... 7,193,900 2,534,236
NET ASSETS:
Beginning of period............................................................... 83,679,099 81,144,863
------------- -------------
End of period..................................................................... $ 90,872,999 $ 83,679,099
============= =============
Accumulated net investment income (loss) at end of period......................... $ (1,811,692) $ (177,040)
============= =============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period.............................................. 5,179,247 5,289,339
Common Shares repurchased*........................................................ (12,207) (110,092)
------------- -------------
Common Shares at end of period.................................................... 5,167,040 5,179,247
============= =============
-----------------------------
* On September 15, 2015, the Fund commenced a share repurchase program. The
program originally expired on March 15, 2016, but the Board of Trustees of the
Fund has subsequently authorized the continuation of the Fund's share
repurchase program until September 15, 2017. For the six months ended June 30,
2017, and the year ended December 31, 2016, the Fund repurchased 12,207 and
110,092, respectively, of its shares at a weighted-average discount of 13.52%
and 14.54%, respectively, from net asset value per share. The Fund expects to
continue the share repurchase program until the earlier of (i) the repurchase
of an additional 105,644 common shares (for an aggregate of 266,389), or (ii)
September 15, 2017.
See Notes to Financial Statements Page 19
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2017 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations................. $ 10,988,586
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by operating activities:
Purchases of investments.................................................. (23,134,230)
Sales, maturities and paydowns of investments............................. 26,242,213
Net amortization/accretion of premiums/discounts on investments........... (160,644)
Net realized gain/loss on investments..................................... (1,624,912)
Net increase from payment by the sub-advisor.............................. (5,000)
Net change in unrealized appreciation/depreciation on forward foreign
currency contracts..................................................... (143,398)
Net change in unrealized appreciation/depreciation on investments......... (7,412,231)
CHANGES IN ASSETS AND LIABILITIES:
Decrease in interest receivable........................................... 118,445
Increase in dividend reclaims receivable.................................. (1,760)
Increase in dividends receivable.......................................... (27,983)
Decrease in due from broker............................................... 14,019
Increase in prepaid expenses.............................................. (12,905)
Decrease in due to custodian.............................................. (66,630)
Decrease in interest and fees on loan payable............................. (8,846)
Increase in investment advisory fees payable.............................. 4,409
Decrease in audit and tax fees payable.................................... (21,122)
Increase in due to broker................................................. 65,233
Increase in legal fees payable............................................ 4,074
Decrease in printing fees payable......................................... (9,941)
Decrease in administrative fees payable................................... (14,669)
Increase in custodian fees payable........................................ 15,764
Increase in transfer agent fees payable................................... 10,913
Increase in Trustees' fees and expenses payable........................... 165
Increase in foreign capital gains tax..................................... 9,584
Increase in other liabilities payable..................................... 664
-------------
CASH PROVIDED BY OPERATING ACTIVITIES........................................... $ 4,829,798
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of Common Shares............................................... (225,571)
Distributions to Common Shareholders from net investment income........... (3,616,928)
-------------
CASH USED IN FINANCING ACTIVITIES............................................... (3,842,499)
-------------
Increase in cash and foreign currency (a)....................................... 987,299
Cash and foreign currency at beginning of period................................ 119,222
-------------
Cash and foreign currency at end of period...................................... $ 1,106,521
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest and fees............................... $ 63,866
=============
-----------------------------
(a) Includes net change in unrealized appreciation (depreciation) on foreign
currency of $(17,557).
Page 20 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
6/30/2017 -------------------------------------------------------------------
(UNAUDITED) 2016 2015 2014 2013 2012
----------- ----------- ----------- ----------- ----------- -----------
Net asset value, beginning of period....... $ 16.16 $ 15.34 $ 18.59 $ 20.61 $ 23.67 $ 20.30
--------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)............... 0.38 0.64 0.65 0.77 0.79 0.90
Net realized and unrealized gain (loss).... 1.74 (a) 1.53 (2.52) (1.39) (2.45) 3.87
--------- --------- --------- --------- --------- ---------
Total from investment operations........... 2.12 2.17 (1.87) (0.62) (1.66) 4.77
--------- --------- --------- --------- --------- ---------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income...................... (0.70) (0.30) -- (0.32) (0.76) (0.88)
Net realized gain.......................... -- (0.35) -- (0.44) (0.64) (0.52)
Return of capital.......................... -- (0.75) (1.40) (0.64) -- --
--------- --------- --------- --------- --------- ---------
Total from distributions................... (0.70) (1.40) (1.40) (1.40) (1.40) (1.40)
--------- --------- --------- --------- --------- ---------
Common share repurchases................... 0.01 0.05 0.02 -- -- --
--------- --------- --------- --------- --------- ---------
Net asset value, end of period............. $ 17.59 $ 16.16 $ 15.34 $ 18.59 $ 20.61 $ 23.67
========= ========= ========= ========= ========= =========
Market value, end of period................ $ 16.06 $ 13.90 $ 13.06 $ 16.45 $ 18.05 $ 22.05
========= ========= ========= ========= ========= =========
TOTAL RETURN BASED ON NET ASSET VALUE (b).. 13.76% 15.93% (9.16)% (2.49)% (6.49)% 24.36%
========= ========= ========= ========= ========= =========
TOTAL RETURN BASED ON MARKET VALUE (b)..... 20.75% 17.12% (12.61)% (1.47)% (12.13)% 32.02%
========= ========= ========= ========= ========= =========
-----------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)....... $ 90,873 $ 83,679 $ 81,145 $ 99,053 $ 109,813 $ 126,093
Ratio of expenses to average net assets.... 1.76% (c) 1.76% 1.69% 1.71% 1.75% 1.78%
Ratio of total expenses to average net
assets excluding interest expense....... 1.64% (c) 1.66% 1.62% 1.64% 1.68% 1.70%
Ratio of net investment income (loss) to
average net assets...................... 4.48% (c) 3.99% 3.66% 3.73% 3.57% 4.04%
Portfolio turnover rate.................... 23% 53% 44% 48% 50% 49%
INDEBTEDNESS:
Total loan outstanding (in 000's).......... $ 5,800 $ 5,800 $ 5,800 $ 5,800 $ 5,800 $ 5,800
Asset coverage per $1,000 of indebtedness
(d)..................................... $ 16,668 $ 15,427 $ 14,990 $ 18,078 $ 19,933 $ 22,740
-----------------------------
(a) During the period ended June 30, 2017, the Fund received a reimbursement
from the sub-advisor in the amount of $5,000 in connection with a trade
error, which represents less than $0.01 per share. Since the sub-advisor
reimbursed the Fund, there was no effect on the total return.
(b) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in net asset value per share
for net asset value returns and changes in Common Share Price for market
value returns. Total returns do not reflect sales load and are not
annualized for periods of less than one year. Past performance is not
indicative of future results.
(c) Annualized.
(d) Calculated by subtracting the Fund's total liabilities (not including the
loan outstanding) from the Fund's total assets, and dividing by the
outstanding loan balance in 000's.
See Notes to Financial Statements Page 21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2017 (UNAUDITED)
1. ORGANIZATION
First Trust/Aberdeen Emerging Opportunity Fund (the "Fund") is a diversified,
closed-end management investment company organized as a Massachusetts business
trust on May 16, 2006 and is registered with the Securities and Exchange
Commission (the "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 provide a high level of total return. The
Fund pursues its objective by investing at least 80% of its Managed Assets in a
diversified portfolio of equity and fixed-income securities of issuers in
emerging market countries. "Managed Assets" means the total asset value of the
Fund minus the sum of the Fund's liabilities other than the principal amount of
borrowings, if any. There can be no assurance that the Fund will achieve its
investment objective.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund is considered an investment company and follows accounting and
reporting guidance under Financial Accounting Standards Board ("FASB")
Accounting Standards Codification ("ASC") Topic 946, "Financial
Services-Investment Companies." The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements. The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America ("U.S.
GAAP") requires management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results
could differ from those estimates.
A. PORTFOLIO VALUATION
The net asset value ("NAV") of the Common Shares of the Fund is determined
daily, as of the close of regular trading on the NYSE, normally 4:00 p.m.
Eastern time, on each day the NYSE is open for trading. If the NYSE closes early
on a valuation day, the NAV is determined as of that time. Domestic debt
securities and foreign securities are priced using data reflecting the earlier
closing of the principal markets for those securities. The Fund's NAV per Common
Share is calculated by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses, dividends declared but unpaid and any borrowings of the Fund), by the
total number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Fund's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Fund's Board of Trustees,
and in accordance with provisions of the 1940 Act. Investments valued by the
Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to
the Portfolio of Investments. The Fund's investments are valued as follows:
Bonds, notes and other debt securities are valued on the basis of
valuations provided by dealers who make markets in such securities or by a
third-party pricing service approved by the Fund's Board of Trustees,
which may use the following valuation inputs when available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Fixed income and other debt securities having a remaining maturity of
sixty days or less when purchased are fair valued at cost adjusted for
amortization of premiums and accretion of discounts (amortized cost),
provided the Advisor's Pricing Committee has determined that the use of
amortized cost is an appropriate reflection of fair value given market and
issuer specific conditions existing at the time of the determination.
Factors that may be considered in determining the appropriateness of the
use of amortized cost include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes thereto;
2) the liquidity conditions in the relevant market and changes thereto;
3) the interest rate conditions in the relevant market and changes
thereto (such as significant changes in interest rates);
Page 22
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2017 (UNAUDITED)
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing Committee
may use last-obtained market-based data to assist it when valuing
portfolio securities using amortized cost.
Common stocks and other securities listed on any national or foreign
exchange (excluding The Nasdaq Stock Market, LLC ("Nasdaq") and the London
Stock Exchange Alternative Investment Market ("AIM")) are valued at the
last sale price on the exchange on which they are principally traded or,
for Nasdaq and AIM securities, the official closing price. Securities
traded on more than one securities exchange are valued at the last sale
price or official closing price, as applicable, at the close of the
securities exchange representing the principal market for such securities.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked prices, if available, and
otherwise at their closing bid price.
Forward foreign currency contracts are valued at the current day's
interpolated foreign exchange rate, as calculated using the current day's
spot rate, and the thirty, sixty, ninety and one-hundred eighty day
forward rates provided by a third-party pricing service.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended, (the "1933 Act")) for which a third-party pricing service is
unable to provide a market price; securities whose trading has been formally
suspended; a security whose market or fair value price is not available from a
pre-established pricing source; a security with respect to which an event has
occurred that is likely to materially affect the value of the security after the
market has closed but before the calculation of the Fund's NAV or make it
difficult or impossible to obtain a reliable market quotation; and a security
whose price, as provided by the third-party pricing service, does not reflect
the security's fair value. As a general principle, the current fair value of a
security would appear to be the amount which the owner might reasonably expect
to receive for the security upon its current sale. When fair value prices are
used, generally they will differ from market quotations or official closing
prices on the applicable exchanges. A variety of factors may be considered in
determining the fair value of such securities, including, but not limited to,
the following:
1) the fundamental business data relating to the issuer, or economic
data relating to the country of issue;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of security;
4) the financial statements of the issuer, or the financial condition
of the country of issue;
5) the credit quality and cash flow of the issuer, or country of issue,
based on Aberdeen Asset Management Inc.'s ("Aberdeen" or the
"Sub-Advisor") or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing
the security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the issuer's management (for corporate debt only);
11) the economic, political and social prospects/developments of the
country of issue and the assessment of the country's governmental
leaders/officials (for sovereign debt only);
12) the prospects for the issuer's industry, and multiples (of earnings
and/or cash flows) being paid for similar businesses in that
industry (for corporate debt only); and
13) other relevant factors.
Fair valuation of an equity security will be based on the consideration of all
available information, including, but not limited to the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or third-party pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might affect
the value of the security.
Page 23
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2017 (UNAUDITED)
If the equity security in question is a foreign security, the following
additional information may be considered:
1) the value of similar foreign securities traded on other foreign
markets;
2) ADR trading of similar securities;
3) closed-end fund trading of similar securities;
4) foreign currency exchange activity;
5) the trading prices of financial products that are tied to baskets of
foreign securities;
6) factors relating to the event that precipitated the pricing problem;
7) whether the event is likely to recur; and
8) whether the effects of the event are isolated or whether they affect
entire markets, countries or regions.
Because foreign markets may be open on different days than the days during which
investors may transact in the shares of the Fund, the value of the Fund's
securities may change on the days when investors are not able to transact in the
shares of the Fund. The value of securities denominated in foreign currencies is
converted into U.S. dollars using exchange rates determined daily as of the
close of regular trading on the NYSE.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of June 30, 2017, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
daily on the accrual basis. Amortization of premiums and accretion of discounts
are recorded by using the effective interest method.
Securities purchased on a when-issued, delayed-delivery or forward commitment
basis may have extended settlement periods. The value of the security so
purchased is subject to market fluctuations during this period. The Fund
maintains liquid assets with a current value at least equal to the amount of its
when-issued, delayed-delivery or forward purchase commitments until payment is
made. At June 30, 2017, the Fund had no when-issued, delayed-delivery or forward
purchase commitments.
C. FORWARD FOREIGN CURRENCY CONTRACTS
The Fund is subject to foreign currency risk in the normal course of pursuing
its investment objective. Forward foreign currency contracts are agreements
between two parties ("Counterparties") to exchange one currency for another at a
future date and at a specified price. The Fund uses forward foreign currency
contracts to facilitate transactions in foreign securities and to manage the
Fund's foreign currency exposure. These contracts are valued daily, and the
Fund's net equity therein, representing unrealized gain or loss on the contracts
as measured by the difference between the forward foreign exchange rates at the
dates of entry into the contracts and the forward rates at the reporting date,
is included in "Unrealized appreciation on forward foreign currency contracts"
and "Unrealized depreciation on forward foreign currency contracts" on the
Statement of Assets and Liabilities. The change in unrealized
appreciation/(depreciation) is included in "Net change in unrealized
appreciation (depreciation) on forward foreign currency contracts" on the
Statement of Operations. When the forward contract is closed, the Fund records a
realized gain or loss equal to the difference between the proceeds from (or the
Page 24
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2017 (UNAUDITED)
cost of) the closing transaction and the Fund's basis in the contract. This
realized gain or loss is included in "Net realized gain (loss) on forward
foreign currency contracts" on the Statement of Operations. Risks arise from the
possible inability of counterparties to meet the terms of their contracts and
from movement in currency and securities values and interest rates. Due to the
risks, the Fund could incur losses in excess of the net unrealized value shown
on the Forward Foreign Currency Contracts table in the Portfolio of Investments.
In the event of default by the Counterparty, the Fund will provide notice to the
Counterparty of the Fund's intent to convert the currency held by the Fund into
the currency that the Counterparty agreed to exchange with the Fund. If a
Counterparty becomes bankrupt or otherwise fails to perform its obligations due
to financial difficulties, the Fund may experience significant delays in
obtaining any recovery in a bankruptcy or other reorganization proceeding. The
Fund may obtain only limited recovery or may obtain no recovery in such
circumstances.
D. OFFSETTING ON THE STATEMENT OF ASSETS AND LIABILITIES
Offsetting Assets and Liabilities requires entities to disclose both gross and
net information about instruments and transactions eligible for offset on the
Statement of Assets and Liabilities, and disclose instruments and transactions
subject to master netting or similar agreements. These disclosure requirements
are intended to help investors and other financial statement users better assess
the effect or potential effect of offsetting arrangements on a fund's financial
position. The transactions subject to offsetting disclosures are derivative
instruments, repurchase agreements and reverse repurchase agreements, and
securities borrowing and securities lending transactions.
For financial reporting purposes, the Fund does not offset financial assets and
financial liabilities that are subject to master netting arrangements ("MNAs")
or similar agreements on the Statement of Assets and Liabilities. MNAs provide
the right, in the event of default (including bankruptcy and insolvency) for the
non-defaulting Counterparty to liquidate the collateral and calculate the net
exposure to the defaulting party or request additional collateral.
At June 30, 2017, derivative assets and liabilities (by type) on a gross basis
are as follows:
Gross Amounts
not Offset in the
Statement of
Net Amounts of Assets and Liabilities
Gross Amounts Assets Presented ------------------------
Gross Amounts of Offset in the in the Statement Collateral
Recognized Statement of Assets of Assets and Financial Amounts
Assets and Liabilities Liabilities Instruments Received Net Amount
------------------------------------------------------------------------------------------------------------------------------
Forward Foreign
Currency Contracts* $ 85,232 $ -- $ 85,232 $ (3,615) $ -- $ 81,617
Gross Amounts
not Offset in the
Net Amounts of Statement of
Liabilities Assets and Liabilities
Gross Amounts Presented ------------------------
Gross Amounts of Offset in the in the Statement Collateral
Recognized Statement of Assets of Assets and Financial Amounts
Liabilities and Liabilities Liabilities Instruments Pledged Net Amount
------------------------------------------------------------------------------------------------------------------------------
Forward Foreign
Currency Contracts* $ (7,495) $ -- $ (7,495) $ 3,615 $ -- $ (3,880)
* The respective Counterparties for each contract are disclosed in the
Forward Foreign Currency Contracts table in the Portfolio of Investments.
E. FOREIGN CURRENCY
The books and records of the Fund are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investments and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statement of Operations. Unrealized gains and losses on
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statement of Operations. Net realized foreign currency gains and losses
include the effect of changes in exchange rates between trade date and
Page 25
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2017 (UNAUDITED)
settlement date on investment security transactions, foreign currency
transactions and interest and dividends received and are shown in "Net realized
gain (loss) on foreign currency transactions" on the Statement of Operations.
The portion of foreign currency gains and losses related to fluctuation in
exchange rates between the initial purchase settlement date and subsequent sale
trade date is included in "Net realized gain (loss) on investments" on the
Statement of Operations.
F. 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 June 30, 2017, the Fund held restricted securities
as shown in the following table that Aberdeen has deemed illiquid pursuant to
procedures adopted by the Trust'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 note (Note 2A) 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 date and
yield for these issuers.
ACQUISITION PAR CURRENT CARRYING % OF NET
SECURITY DATE AMOUNT PRICE COST VALUE ASSETS
--------------------------------------------------------------------------------------------------------------------------
OAS Finance Ltd, 8.88% 4/18/2013 350,000 $ 5.50 $ 350,000 $ 19,250 0.02%
OAS Investments GmbH, 8.25%, 10/19/19 10/15/2012 200,000 5.50 200,000 11,000 0.01
----------------------------------
$ 550,000 $ 30,250 0.03%
==================================
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Level dividend distributions are declared and paid quarterly to Common
Shareholders after the payment of interest and/or dividends in connection with
leverage. The level dividend rate may be modified by the Board of Trustees from
time to time. If, for any quarterly distribution, net investment company taxable
income, if any (which term includes net short-term capital gain), is less than
the amount of the distribution, the difference will generally be a tax-free
return of capital distributed from the Fund's assets. Distributions of any net
long-term capital gains earned by the Fund are distributed at least annually.
Distributions will automatically be reinvested into additional Common Shares
pursuant to the Fund's Dividend Reinvestment Plan unless cash distributions are
elected by the shareholder.
Distributions from income and capital gains are determined in accordance with
federal income tax regulations, which may differ from U.S. GAAP. Certain capital
accounts in the financial statements are periodically adjusted for permanent
differences in order to reflect their tax character. These permanent differences
are primarily due to the varying treatment of income and gain/loss on portfolio
securities held by the Fund and have no impact on net assets or NAV per Common
Share. Temporary differences, which arise from recognizing certain items of
income, expense and gain/loss in different periods for financial statement and
tax purposes, will reverse at some point in the future.
The tax character of distributions paid during the fiscal year ended December
31, 2016 was as follows:
Distributions paid from:
Ordinary income................................. $ 1,690,613
Capital gain.................................... 1,709,674
Return of capital............................... 3,931,866
As of December 31, 2016, the distributable earnings and net assets on a tax
basis were as follows:
Accumulated capital and other losses ........... (294,550)
Net unrealized appreciation (depreciation) ..... 4,585,408
-------------
Total accumulated earnings (losses)............. 4,290,858
Other........................................... (23,259)
Paid-in capital................................. 79,411,500
-------------
Net assets...................................... 83,679,099
=============
Page 26
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2017 (UNAUDITED)
H. INCOME AND OTHER TAXES
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), which includes distributing substantially all
of its net investment income and net realized gains to shareholders.
Accordingly, no provision has been made for federal or state income taxes.
However, due to the timing and amount of distributions, the Fund may be subject
to an excise tax of 4% of the amount by which approximately 98% of the Fund's
taxable income exceeds the distributions from such taxable income for the
calendar year.
Certain countries assess a capital gains tax on securities sold in their local
markets. This tax is accrued as the securities in these foreign markets
appreciate in value and is paid at the time of sale to the extent a capital gain
is realized. Taxes accrued on securities in an unrealized appreciation position
are included in "Net change in unrealized appreciation (depreciation)" on the
Statement of Operations. The capital gains tax paid on securities sold is
included in "Net realized gain (loss) on foreign capital gains tax" on the
Statement of Operations.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At December 31, 2016, the
Fund had no non-expiring capital loss carryforwards for federal income tax
purposes.
Certain losses realized during the current fiscal year may be deferred and
treated as occurring on the first day of the following fiscal year for federal
income tax purposes. For the fiscal year ended December 31, 2016, the Fund
incurred and elected to defer capital losses of $294,550 .
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ended 2013, 2014,
2015, and 2016 remain open to federal and state audit. As of June 30, 2017,
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.
I. EXPENSES
The Fund will pay all expenses directly related to its operations.
J. NEW AND AMENDED FINANCIAL REPORTING RULES AND FORMS On October 13, 2016, the
SEC adopted new rules and forms, and amended existing rules and forms. The new
and amended rules and forms are intended to modernize the reporting of
information provided by funds and to improve the quality and type of information
that funds provide to the SEC and investors. The new and amended rules and forms
will be effective for the First Trust funds, including the Fund, for reporting
periods beginning on and after June 1, 2018. Management is evaluating the new
and amended rules and forms to determine the impact to the Fund.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
services, First Trust is entitled to a monthly fee calculated at an annual rate
of 1.00% of the Fund's Managed Assets. First Trust also provides fund reporting
services to the Fund for a flat annual fee in the amount of $9,250.
Aberdeen serves as the Fund's sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor receives a monthly
portfolio management fee calculated at an annual rate of 0.50% of the Fund's
Managed Assets that is paid by First Trust out of its investment advisory fee.
During the six months ended June 30, 2017, the Fund received a payment from the
Sub-Advisor of $5,000 in connection with a trade error.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
transfer agent in accordance with certain fee arrangements. As transfer agent,
BNYM IS is responsible for maintaining shareholder records for the Fund. The
Bank of New York Mellon ("BNYM") serves as the Fund's administrator, fund
accountant, and custodian in accordance with certain fee arrangements. As
administrator and fund accountant, BNYM is responsible for providing certain
Page 27
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2017 (UNAUDITED)
administrative and accounting services to the Fund, including maintaining the
Fund's books of account, records of the Fund's securities transactions, and
certain other books and records. As custodian, BNYM is responsible for custody
of the Fund's assets. BNYM IS and BNYM are subsidiaries of The Bank of New York
Mellon Corporation, a financial holding company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated equally among each fund in the First Trust Fund
Complex. Each Independent Trustee is also paid an annual per fund fee that
varies based on whether the fund is a closed-end or other actively managed fund,
or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Trustees are reimbursed for travel and out-of-pocket expenses in connection with
all meetings. The Lead Independent Trustee and Committee Chairmen rotate every
three years. The officers and "Interested" Trustee receive no compensation from
the Trust for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
The cost of purchases and proceeds from sales of investments, excluding
short-term investments, for the six months ended June 30, 2017, were $20,776,437
and $24,767,529, respectively.
5. DERIVATIVES TRANSACTIONS
The following table presents the type of derivative held by the Fund at June 30,
2017, the primary underlying risk exposure and location of these instruments as
presented on the Statement of Assets and Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES
--------------------------------------- ----------------------------------------
DERIVATIVE STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND
INSTRUMENT RISK EXPOSURE LIABILITIES LOCATION VALUE LIABILITIES LOCATION VALUE
------------------ --------------- ----------------------- -------------- ----------------------- ---------------
Unrealized appreciation Unrealized depreciation
Forward foreign on forward foreign on forward foreign
currency contracts Currency Risk currency contracts $ 85,232 currency contracts $ 7,495
The following table presents the amount of net realized gain(loss) and change in
net unrealized appreciation (depreciation) recognized for the six months ended
June 30, 2017, on derivative instruments, as well as the primary underlying risk
exposure associated with each instrument.
STATEMENT OF OPERATIONS LOCATION
--------------------------------------------------------------------------------
CURRENCY RISK EXPOSURE
Net realized gain (loss) on forward foreign currency contracts $ (99,790)
Net change in unrealized appreciation (depreciation) on forward
foreign currency contracts $ 143,398
During the six months ended June 30, 2017, notional values of forward foreign
currency contracts opened and closed were $34,830,827 and $33,932,969,
respectively.
6. BORROWINGS
The Fund has entered into a credit agreement with The Bank of Nova Scotia, which
provides for a revolving credit facility to be used as leverage for the Fund.
The revolving credit facility provides for a secured line of credit for the Fund
where Fund assets are pledged against advances made to the Fund. Under the
requirements of the 1940 Act, the Fund, immediately after any such borrowings,
must have an "asset coverage" of at least 300% (33-1/3% of the Fund's total
assets after borrowings). Effective November 4, 2016, the credit facility was
amended, whereby the expiration date was extended until November 3, 2017. The
total commitment under the facility is up to $10,000,000. The borrowing rate
under the revolving credit facility is equal to the 1-month LIBOR plus 80 basis
points. Prior to November 4, 2016, the borrowing rate under the revolving credit
facility was equal to the 1-month LIBOR plus 75 basis points. As of June 30,
2017, the Fund had one loan outstanding under the revolving credit facility
totaling $5,800,000. For six months ended June 30, 2017, the average amount
outstanding was $5,800,000. The high and low annual interest rates during the
six months ended June 30, 2017 were 2.02% and 1.53%, respectively, and the
weighted average interest rate was 1.69%. The interest rate at June 30, 2017 was
2.02%. The Fund pays a commitment fee of 0.15% (or 0.25% if loan balance drops
below 75% of total commitment) per year, which is included in "Interest and fees
on loan" on the Statement of Operations.
Page 28
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2017 (UNAUDITED)
7. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
8. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Fund through
the date the financial statements were issued, and has determined that there
were the following subsequent events: Aberdeen, a Securities and Exchange
Commission registered investment advisor, is a wholly-owned subsidiary of
Aberdeen Asset Management PLC ("Aberdeen PLC"). The merger of Standard Life plc
and Aberdeen PLC, announced on March 6, 2017 ("Merger"), closed on August 14,
2017. Aberdeen PLC became a direct subsidiary of Standard Life plc as a result
of the Merger and the combined company changed its name to Standard Life
Aberdeen plc. Shareholders of the Fund are not required to take any action as a
result of the Merger. Following the Merger, the Sub-Advisor is an indirect
subsidiary of Standard Life Aberdeen plc, but otherwise did not change. The
sub-advisory agreement, the services provided under the agreement, and the fees
charged for services did not change as a result of the Merger. The portfolio
management team did not change as a result of the Merger.
Page 29
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2017 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer shares
than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
--------------------------------------------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
Page 30
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2017 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Form N-Qs
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 Fund held its Annual Meeting of Shareholders ("Annual Meeting") on April 24,
2017. At the Annual Meeting, Robert F. Keith was elected by the Common
Shareholders of the First Trust Strategic High Income Fund II as the Class I
Trustee for a three-year term expiring at the Fund's annual meeting of
shareholders in 2020. The number of votes cast in favor of Mr. Keith was
4,252,538, the number of votes withheld was 420,249 and the number of broker
non-votes was 502,449. James A. Bowen, Niel B. Nielson, Richard E. Erickson, and
Thomas R. Kadlec are the other current and continuing Trustees.
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATION 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") for a one-year period ending
June 30, 2018 at a meeting held on June 12, 2017. The Board determined that the
continuation of the Agreements is in the best interests of the Fund in light of
the extent and quality of the services provided and such other matters as the
Board considered to be relevant in the exercise of its reasonable business
judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. At meetings held on April 24, 2017 and June 12, 2017, the
Board, including the Independent Trustees, reviewed materials provided by the
Advisor and the Sub-Advisor responding to requests for information from counsel
to the Independent Trustees that, among other things, outlined the services
provided by the Advisor and the Sub-Advisor to the Fund (including the relevant
personnel responsible for these services and their experience); the advisory fee
rate payable by the Fund and the sub-advisory fee rate as compared to fees
charged to a peer group of funds compiled by Management Practice, Inc. ("MPI"),
an independent source (the "MPI Peer Group"), and as compared to fees charged to
other clients of the Advisor and the Sub-Advisor; expenses of the Fund as
compared to expense ratios of the funds in the MPI Peer Group; performance
information for the Fund; 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 Board reviewed initial materials with the Advisor at the meeting
held on April 24, 2017, prior to which the Independent Trustees and their
counsel met separately to discuss the information provided by the Advisor and
the Sub-Advisor. Following the April meeting, independent legal counsel on
behalf of the Independent Trustees requested certain clarifications and
supplements to the materials provided, and the information provided in response
to those requests was considered at an executive session of the Independent
Trustees and independent legal counsel held prior to the June 12, 2017 meeting,
as well as at the meeting held that day. 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 continue to be reasonable business
arrangements from the Fund's perspective as well as from the perspective of
shareholders. The Board determined that, given the totality of the information
provided with respect to the Agreements, the Board had received sufficient
information to renew the Agreements. The Board considered that shareholders
chose to invest or remain invested in the Fund knowing that the Advisor and the
Sub Advisor manage the Fund.
In reviewing the Agreements, the Board considered the nature, extent and quality
of the services provided by the Advisor and the Sub-Advisor under the
Agreements. With respect to the Advisory Agreement, the Board considered that
the Advisor is responsible for the overall management and administration of the
Fund and reviewed all of the services provided by the Advisor to the Fund,
including the oversight of the Sub-Advisor, as well as the background and
experience of the persons responsible for such services. The Board noted that
the Advisor oversees the Sub-Advisor's day-to-day management of the Fund's
investments, including portfolio risk monitoring and performance review. In
reviewing the services provided, the Board noted the compliance program that had
been developed by the Advisor and considered that it includes a robust program
for monitoring the Advisor's, the Sub-Advisor's and the Fund's compliance with
the 1940 Act, as well as the Fund's compliance with its investment objective and
Page 31
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2017 (UNAUDITED)
policies. The Board also considered a report from the Advisor with respect to
its risk management functions related to the operation of the Fund. Finally, as
part of the Board's consideration of the Advisor's services, the Advisor, in its
written materials and at the April 24, 2017 meeting, described to the Board the
scope of its ongoing investment in additional infrastructure and personnel to
maintain and improve the quality of services provided to the Fund and the other
funds in the First Trust Fund Complex. With respect to the Sub-Advisory
Agreement, the Board reviewed the materials provided by the Sub-Advisor and
considered the services that the Sub-Advisor provides to the Fund, including the
Sub-Advisor's day-to-day management of the Fund's investments. In considering
the Sub-Advisor's management of the Fund, the Board noted the background and
experience of the Sub-Advisor's portfolio management team and the Board's prior
meetings with members of the portfolio management team. The Board also
considered information provided by the Sub-Advisor on the transaction between
the Sub-Advisor's parent company, Aberdeen Asset Management plc, and Standard
Life plc that is expected to close in the third quarter of 2017 and result in
the combination of the two companies. The Board noted the Sub-Advisor's
statements that the transaction is not expected to have a significant impact on
its management of the Fund and that the same portfolio management team is
expected to continue to provide services after the completion of the
transaction. In light of the information presented and the considerations made,
the Board concluded that the nature, extent and quality of the 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 fee rates payable under the
Agreements for the services provided. The Board noted that the sub-advisory fee
is paid by the Advisor from its advisory fee. The Board received and reviewed
information showing the advisory fee rates and expense ratios of the peer funds
in the MPI Peer Group, as well as advisory fee rates charged by the Advisor and
the Sub-Advisor to other fund and non-fund clients, as applicable. With respect
to the MPI Peer Group, the Board discussed with representatives of the Advisor
how the MPI Peer Group was assembled and limitations in creating a relevant peer
group for the Fund, including that (i) the Fund is unique in its composition,
which makes assembling peers with similar strategies and asset mix difficult;
(ii) peer funds may use different amounts and types of leverage with different
costs associated with them or may use no leverage; (iii) none of the peer funds
employs an advisor/sub-advisor management structure with an unaffiliated
sub-advisor; (iv) all of the peer funds are larger than the Fund, which causes
the Fund's fixed expenses to be higher on a percentage basis as compared to the
larger peer funds; and (v) some of the peer funds are part of a larger fund
complex that may allow for additional economies of scale. The Board took these
limitations into account in considering the peer data, and noted that the
advisory fee rate payable by the Fund, based on average managed assets, was at
the median of the MPI Peer Group. With respect to fees charged to other clients,
the Board considered differences between the Fund and other clients that limited
their comparability. In considering the advisory fee rate overall, the Board
also considered the Advisor's statement that it seeks to meet investor needs
through innovative and value-added investment solutions and the Advisor's
description of its long-term commitment to the Fund.
The Board considered performance information for the Fund. The Board noted the
process it has established for monitoring the Fund's performance and portfolio
risk on an ongoing basis, which includes quarterly performance reporting from
the Advisor and Sub-Advisor for the Fund. The Board determined that this process
continues to be effective for reviewing the Fund's performance. The Board
received and reviewed information comparing the Fund's performance for periods
ended December 31, 2016 to the performance of the MPI Peer Group and to a
blended benchmark index. In reviewing the Fund's performance as compared to the
performance of the MPI Peer Group, the Board took into account the limitations
described above with respect to creating a relevant peer group for the Fund.
Based on the information provided on net asset value performance, the Board
noted that the Fund outperformed the MPI Peer Group average for the one-, three-
and five-year periods ended December 31, 2016. The Board also noted that the
Fund outperformed its blended benchmark in each period. In addition, the Board
considered information provided by the Advisor on the impact of leverage on the
Fund's returns. The Board also received information on the Fund's annual
distribution rate as of December 31, 2016 and the Fund's average trading
discount during 2016 and comparable information for the peer group.
On the basis of all the information provided on the fees, expenses and
performance of the Fund and the ongoing oversight by the Board, the Board
concluded that the advisory and sub-advisory fees continued to be reasonable and
appropriate in light of the nature, extent and quality of the services provided
by the Advisor and the Sub-Advisor under the Agreements.
The Board considered information and discussed with the Advisor whether there
were any economies of scale in connection with providing advisory services to
the Fund and noted the Advisor's statement that it expects its expenses to
increase over the next twelve months as the Advisor continues to make
investments in personnel and infrastructure. The Board determined that due to
the Fund's closed-end structure, the potential for realization of economies of
scale as Fund assets grow was not a material factor to be considered. The Board
considered the revenues and allocated costs (including the allocation
methodology) of the Advisor in serving as investment advisor to the Fund for the
twelve months ended December 31, 2016 and the estimated profitability level for
the Fund calculated by the Advisor based on such data, as well as complex-wide
and product-line profitability data for the same period. The Board noted the
inherent limitations in the profitability analysis and concluded that, based on
the information provided, the Advisor's profitability level for the Fund was not
Page 32
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2017 (UNAUDITED)
unreasonable. In addition, the Board considered fall-out benefits described by
the Advisor that may be realized from its relationship with the Fund, including
the Advisor's compensation for fund reporting services pursuant to a separate
Fund Reporting Services Agreement. The Board concluded that the character and
amount of potential fall-out benefits to the Advisor were not unreasonable.
The Board considered the Sub-Advisor's representation that because it manages
the Fund in a similar fashion to other accounts it is able to achieve economies
of scale through relationships with brokers, administrative systems and other
operational efficiencies and that while it expects operating costs in general to
continue to rise, it continues to expect to experience the benefits of economies
of scale. The Board did not review the profitability of the Sub-Advisor with
respect to the Fund. The Board noted that the Advisor pays the Sub-Advisor from
its advisory fee, and its understanding that the Fund's sub-advisory fee rate
was the product of an arm's length negotiation. The Board concluded that the
profitability analysis for the Advisor was more relevant. The Board considered
fall-out benefits that may be realized by the Sub-Advisor from its relationship
with the Fund, including that the Sub-Advisor may enter into soft dollar and
commission sharing arrangements, and considered a summary of such arrangements.
The Board concluded that the character and amount of potential fall-out benefits
to the Sub-Advisor were not unreasonable.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreements continue to be fair and reasonable and that the continuation
of the Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some, but not all,
of the risks that should be considered for the Fund. For additional information
about the risks associated with investing in the Fund, please see the Fund's
prospectus and statement of additional information, as well as other Fund
regulatory filings.
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.
EMERGING MARKETS RISK: Under normal market conditions, the Fund will invest at
least 80% of its Managed Assets in equity or fixed-income securities of issuers
located in countries considered to be emerging markets. Investments in such
securities are considered speculative. In addition to the general risks of
investing in non-U.S. securities, heightened risks of investing in emerging
markets securities include: smaller market capitalization of securities markets,
which may suffer periods of relative illiquidity; significant price volatility;
restrictions on foreign investment; and possible restrictions on repatriation of
investment income and capital. Furthermore, foreign investors may be required to
register the proceeds of sales, and future economic or political crises could
lead to price controls, forced mergers, expropriation or confiscatory taxation,
seizure, nationalization or creation of government monopolies. The currencies of
emerging market countries may experience significant declines against the U.S.
dollar, and devaluation may occur subsequent to investments in these currencies
by the Fund. Inflation and rapid fluctuations in inflation rates have had, and
may continue to have, negative effects on the economies and securities markets
of certain emerging market countries.
EQUITY SECURITIES RISK: Stock markets are volatile, and the prices of equity
securities fluctuate based on changes in a company's financial condition and
overall market and economic conditions. Although common stocks have historically
generated higher average total returns than fixed income securities over the
long-term, common stocks also have experienced significantly more volatility in
those returns and, in certain periods, have significantly under-performed
relative to fixed income securities. An adverse event, such as an unfavorable
earnings report, may depress the value of a particular common stock held by the
Fund. A common stock may also decline due to factors which affect a particular
industry or industries, such as labor shortages or increased production costs
and competitive conditions within an industry. The value of a particular common
stock held by the Fund may decline for a number of other reasons which directly
relate to the issuer, such as management performance, financial leverage, the
issuer's historical and prospective earnings, the value of its assets and
reduced demand for its goods and services. Also, the prices of common stocks are
sensitive to general movements in the stock market and a drop in the stock
market may depress the price of common stocks to which the Fund has exposure.
Common stock prices fluctuate for several reasons, including changes in
investors' perceptions of the financial condition of an issuer or the general
condition of the relevant stock market, or when political or economic events
affecting the issuers occur. In addition, common stock prices may be
particularly sensitive to rising interest rates, as the cost of capital rises
and borrowing costs increase. Common equity securities in which the Fund may
invest are structurally subordinated to preferred stock, bonds and other debt
instruments in a company's capital structure in terms of priority to corporate
income and are therefore inherently more risky than preferred stock or debt
instruments of such issuers.
Page 33
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2017 (UNAUDITED)
FIXED-INCOME SECURITIES RISK: Debt securities, including high-yield securities,
are subject to certain risks, including: (i) issuer risk, which is the risk that
the value of fixed-income securities may decline for a number of reasons which
directly relate to the issuer, such as management performance, financial
leverage and reduced demand for the issuer's goods and services or; (ii)
reinvestment risk, which is the risk that income from the Fund's portfolio will
decline if the Fund invests the proceeds from matured, traded or called bonds at
market interest rates that are below the Fund portfolio's current earnings rate;
(iii) prepayment risk, which is the risk that during periods of declining
interest rates, the issuer of a security may exercise its option to prepay
principal earlier than scheduled, forcing the reinvestment in lower yielding
securities; and (iv) credit risk, which is the risk that a security in the
Fund's portfolio will decline in price or the issuer fails to make interest
payments when due because the issuer of the security experiences a decline in
its financial status.
GEOGRAPHIC CONCENTRATION RISK: The Fund may invest from time to time a
substantial amount of its assets in issuers located in a single country or
region. Investments in a single region, although representing a number of
different countries within the region, may be affected by common economic forces
and other factors. Because the Fund may concentrate its investments in this
manner, it could assume the risk that economic, political and social conditions
in those countries will have a significant impact on its investment performance.
In addition, the Fund's investment performance may also be more volatile if it
concentrates its investments in certain countries, especially emerging market
countries.
GOVERNMENT SECURITIES RISK: The ability of a government issuer, especially in an
emerging market country, to make timely and complete payments on its debt
obligations will be strongly influenced by the government issuer's balance of
payments, including export performance, its access to international credits and
investments, fluctuations of interest rates and the extent of its foreign
reserves. A country whose exports are concentrated in a few commodities or whose
economy depends on certain strategic imports could be vulnerable to fluctuations
in international prices of these commodities or imports. To the extent that a
country receives payment for its exports in currencies other than U.S. dollars,
its ability to make debt payments denominated in U.S. dollars could be adversely
affected. If a government issuer cannot generate sufficient earnings from
foreign trade to service its external debt, it may need to depend on continuing
loans and aid from foreign governments, commercial banks, and multinational
organizations. There are no bankruptcy proceedings similar to those in the
United States by which defaulted government debt may be collected. Additional
factors that may influence a government issuer's ability or willingness to
service debt include, but are not limited to, a country's cash flow situation,
the availability of sufficient foreign exchange on the date a payment is due,
the relative size of its debt service burden to the economy as a whole, and the
issuer's policy towards the International Monetary Fund, the International Bank
for Reconstruction and Development and other international agencies to which a
government debtor may be subject.
INTEREST RATE RISK: The Fund's portfolio is also subject to interest rate risk.
Interest rate risk is the risk that fixed-income securities will decline in
value because of changes in market interest rates. Investments in debt
securities with long-term maturities may experience significant price declines
if long-term interest rates increase. Interest rate risk may be greater in the
current market environment because certain interest rates are at or near
historic lows and are anticipated to rise in the near future.
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.
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.
MARKET DISRUPTION AND GEOPOLITICAL RISK: Some countries in which the Fund
invests have experienced security concerns, war or threats of war and
aggression, terrorism, economic uncertainty, natural and environmental disasters
and/or systemic market dislocations that have led, and in the future may lead,
to increased short term market volatility and may have adverse long term effects
on the local and world economies and markets generally, each of which may
negatively impact the Fund's investments. The events occurring in one country or
region may spread through, or otherwise effect, other countries and regions and
therefore adversely impact the Fund's investments in such countries and regions.
Page 34
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2017 (UNAUDITED)
NON-INVESTMENT GRADE SECURITIES RISK: The Fund may invest up to 80% of its
Managed Assets in non-investment grade securities. Non-investment grade
securities are rated below "Baa3" by Moody's Investors Service, Inc., below
"BBB-" by Standard & Poor's, or comparably rated by another nationally
recognized statistical rating organization or, if unrated, determined by the
Sub-Advisor to be of comparable credit quality. Non-investment grade debt
instruments are commonly referred to as "high-yield" or "junk" bonds and are
considered speculative with respect to the issuer's capacity to pay interest and
repay principal and are susceptible to default or decline in market value due to
adverse economic and business developments. The market values for high-yield
securities tend to be very volatile, and these securities are less liquid than
investment grade debt securities.
NON-U.S. ISSUER RISK: Investments in the securities and instruments of non-U.S.
issuers involve certain considerations and risks not ordinarily associated with
investments in securities and instruments of U.S. issuers. Non-U.S. companies
are not generally subject to uniform accounting, auditing and financial
standards and requirements comparable to those applicable to U.S. companies.
Non-U.S. securities exchanges, brokers and listed companies may be subject to
less government supervision and regulation than exists in the United States.
Dividend and interest income may be subject to withholding and other non-U.S.
taxes, which may adversely affect the net return on such investments. There may
be difficulty in obtaining or enforcing a court judgment abroad.
NON-U.S. GOVERNMENT SECURITIES RISK: Economies and social and political climates
in individual countries may differ unfavorably from the United States. Non-U.S.
economies may have less favorable rates of growth of gross domestic product,
rates of inflation, currency valuation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Many countries have
experienced extremely high rates of inflation for many years. Unanticipated
economic, political and social developments may also affect the values of the
Fund's investments and limit the availability of additional investments in such
countries. Furthermore, such developments may significantly disrupt the
financial markets or interfere with the Fund's ability to enforce its rights
against non-U.S. government issuers.
Investments in debt instruments of issuers located in emerging market countries
are considered speculative. Heightened risks of investing in emerging markets
government debt include: smaller market capitalization of securities markets,
which may suffer periods of relative illiquidity; significant price volatility;
restrictions on foreign investment; and possible repatriation of investment
income and capital. Furthermore, foreign investors may be required to register
the proceeds of sales and future economic or political crises could lead to
price controls, forced mergers, expropriation or confiscatory taxation, seizure,
nationalization or creation of government monopolies. The currencies of emerging
market countries may experience significant declines against the U.S. dollar,
and devaluation may occur subsequent to investments in these currencies by the
Fund. Inflation and rapid fluctuations in inflation rates have had, and may
continue to have, negative effects on the economies and securities markets of
certain emerging market countries.
Page 35
This Page Left Blank Intentionally.
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Aberdeen Asset Management Inc.
1735 Market Street, 32nd Floor
Philadelphia, PA 19103
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
ADMINISTRATOR,
FUND ACCOUNTANT,
AND CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a) Not applicable.
(b) There have been no changes, as of the date of this 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.
(c) TOTAL NUMBER OF (d) MAXIMUM NUMBER (OR
(a) TOTAL NUMBER (b) AVERAGE SHARES (OR UNITS) APPROXIMATE DOLLAR VALUE)
OF SHARES PRICE PAID PURCHASED AS PART OF OF SHARES (OR UNITS) THAT
(OR UNITS) PER SHARE PUBLICLY ANNOUNCED MAY YET BE PURCHASED UNDER
PERIOD PURCHASED (OR UNIT) PLANS OR PROGRAMS THE PLANS OR PROGRAMS
Month #1
(01/01/2017 -
01/31/2017) 4,011 14.248 152,549 113,840
Month #2
(02/01/2017 - 5,696 14.630 158,245 108,144
02/29/2017)
Month #3
(03/01/2017 - 2,500 14.910 160,745 105,644
03/31/2017)
Month #4
(04/01/2017- 0 0 160,745 105,644
04/30/2017)
Month #5
(05/01/2017- 0 0 160,745 105,644
05/31/2017)
Month #6
(06/01/2017- 0 0 160,745 105,644
06/30/2017)
Total 12,207 14.562 160,745 105,644
On September 15, 2015, the Fund commenced a share repurchase program. The
program originally expired on March 15, 2016, but the Board of Trustees of the
Fund has subsequently authorized the continuation of the Fund's share repurchase
program until September 15, 2017. For the six months ended June 30, 2017, and
the year ended December 31, 2016, the Fund repurchased 12,207 and 110,092,
respectively, of its shares at a weighted-average discount of 13.52% and 14.54%,
respectively, from net asset value per share. The Fund expects to continue the
share repurchase program until the earlier of (i) the repurchase of an
additional 105,644 common shares (for an aggregate of 266,389), or (ii)
September 15, 2017.
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 M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: August 21, 2017
------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: August 21, 2017
------------------
By (Signature and Title)* /s/ Donald P. Swade
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: August 21, 2017
------------------
* Print the name and title of each signing officer under his or her signature.