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, 2016
---------------
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, 2016
ABERDEEN
ASSET MANAGEMENT FIRST TRUST
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
SEMI-ANNUAL REPORT
JUNE 30, 2016
Shareholder Letter.......................................................... 1
At a Glance................................................................. 2
Portfolio Commentary........................................................ 4
Portfolio of Investments.................................................... 7
Statement of Assets and Liabilities......................................... 16
Statement of Operations..................................................... 17
Statements of Changes in Net Assets......................................... 18
Statement of Cash Flows..................................................... 19
Financial Highlights........................................................ 20
Notes to Financial Statements............................................... 21
Additional Information...................................................... 28
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 material
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 webpage 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, 2016
Dear Shareholders:
Thank you for your investment in First Trust /Aberdeen Emerging Opportunity Fund
(the "Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with this
semi-annual report which contains detailed information about your investment for
the six months ended June 30, 2016, including a market overview and a
performance analysis for the period. We encourage you to read this report and
discuss it with your financial advisor.
While markets were up and down during 2015, we believe there are three important
things to remember. First, the U.S. economy grew, despite the massive decline in
oil prices. Second, the tapering that began in 2014 by the Federal Reserve (the
"Fed") did not stop growth in the U.S. economy. Finally, the long-anticipated
rate hike by the Fed in December had little effect on the money supply, and the
stock market was not shocked by the hike. Early in 2016, many investors were
concerned that the volatility we saw in the market in 2015 would continue, and
it did. From December 31, 2015 through February 11, 2016, the S&P 500(R) Index
declined by 10.27%. Since then, the market has made a steady comeback, and as of
June 30, 2016, the S&P 500(R) Index was up 15.73%.
First Trust believes that having a long-term investment horizon and investing in
quality products can help you reach your goals, regardless of how the market
behaves. We have always maintained perspective about the markets and believe
investors should as well. We will continue to strive to provide quality
investment opportunities each and every day, which has been one of the hallmarks
of our firm since its inception 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue to focus on helping
investors like you reach your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
"AT A GLANCE"
AS OF JUNE 30, 2016 (UNAUDITED)
---------------------------------------------------------------------
FUND STATISTICS
---------------------------------------------------------------------
Symbol on New York Stock Exchange FEO
Common Share Price $14.72
Common Share Net Asset Value ("NAV") $16.78
Premium (Discount) to NAV (12.28)%
Net Assets Applicable to Common Shares $88,133,286
Current Quarterly Distribution per Common Share (1) $0.350
Current Annualized Distribution per Common Share $1.400
Current Distribution Rate on Closing Common Share Price (2) 9.51%
Current Distribution Rate on NAV (2) 8.34%
---------------------------------------------------------------------
-----------------------------------------------
COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
-----------------------------------------------
Common Share Price NAV
6/15 $15.89 $18.09
15.99 18.14
15.64 17.94
15.76 18.09
15.39 17.64
7/15 15.36 17.64
14.86 17.38
14.64 17.13
13.81 16.48
8/15 13.74 16.49
13.54 16.08
13.68 16.13
13.76 16.36
9/15 13.21 15.60
13.26 15.78
13.81 16.56
14.01 16.63
14.13 16.59
10/15 13.94 16.39
14.03 16.48
13.61 16.15
14.05 16.51
11/15 13.87 16.20
13.70 16.09
13.05 15.45
13.30 15.62
13.10 15.46
12/15 13.06 15.34
12.57 14.73
11.99 14.32
1/16 11.99 14.43
12.46 14.86
12.11 14.60
12.47 14.94
2/16 12.59 14.93
13.43 15.81
13.79 16.07
3/16 14.02 16.41
13.93 16.22
13.96 16.06
14.14 16.52
14.45 16.56
4/16 14.51 16.65
14.10 16.24
13.92 16.19
13.85 16.02
5/16 13.98 16.23
14.25 16.50
14.56 16.59
14.47 16.52
14.36 16.17
6/16 14.72 16.78
-----------------------------------------------------------------------------------------------------------------------
PERFORMANCE
-----------------------------------------------------------------------------------------------------------------------
Average Annual Total Return
-------------------------------------
6 Months Ended 1 Year Ended 5 Years Ended Inception (08/28/06)
6/30/16 6/30/16 6/30/16 to 6/30/16
FUND PERFORMANCE (3)
NAV 14.78% 2.66% 1.77% 7.21%
Market Value 18.27% 2.52% 0.95% 5.30%
INDEX PERFORMANCE
Blended Index(4) 10.24% -0.27% 0.61% 5.90%
Barclays Capital Global Emerging Markets Index 9.06% 7.26% 5.22% 7.02%
FTSE All World Emerging Market Index 8.07% -11.87% -2.90% 4.07%
-----------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------
% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
--------------------------------------------------------------------
Russian Federal Bond - Ofz (RUB), 7.05%, 1/19/28 5.0%
Brazil Notas Do Tesouro Nacional Series F (BRL),
10%, 1/1/25 4.3
Peruvian Government International Bond (PEN),
6.9%, 8/12/37 2.2
Turkey (Rep Of) 10.4% (TRY), 10.4%, 3/20/24 2.2
Samsung Electronics Co., Ltd., Preference Shares, 0% 1.9
South Africa Government Bond (ZAR), 10.5%, 12/21/26 1.6
Astra International Tbk Pt, 0% 1.6
Indonesia Treasury Bond (IDR), 8.38%, 3/15/34 1.5
Housing Development Finance Corp, 0% 1.5
Mexican Bonos (MXN), 8.5%, 11/18/38 1.5
--------------------------------------------------------------------
Total 23.3%
======
-----------------------------------
% OF TOTAL
TOP 10 COUNTRIES(5) INVESTMENTS
-----------------------------------
Brazil 11.7%
Russia 8.6
Mexico 7.1
India 7.0
South Africa 6.9
Turkey 6.1
Indonesia 5.5
Hong Kong 3.6
Argentina 3.3
Poland 3.2
-----------------------------------
Total 63.0%
======
(1) Most recent distribution paid or declared through 6/30/2016. 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 6/30/2016. 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.
(6) The credit quality and ratings information presented above reflects the
ratings assigned by one or more nationally recognized statistical rating
organizations (NRSROs), including Standard & Poor's Rating Group, a
division of the McGraw-Hill Companies, Inc., Moody's Investors Service,
Inc., Fitch Ratings or a comparably rated NRSRO. For situations in which a
security is rated by more than one NRSRO and the ratings are not
equivalent, the highest ratings are used. The credit ratings shown relate
to the creditworthiness of the issuers of the underlying securities in the
Fund, and not to the Fund or its Shares. Credit ratings are subject to
change.
Page 2
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
"AT A GLANCE" (CONTINUED)
AS OF JUNE 30, 2016 (UNAUDITED)
-----------------------------------------------------
% OF TOTAL
INDUSTRY CLASSIFICATION INVESTMENTS
-----------------------------------------------------
Sovereigns 41.8%
Banks 10.7
Real Estate Management & Development 3.0
Construction Materials 2.8
Food & Staples Retailing 2.8
Integrated Oils 2.6
Oil, Gas & Consumable Fuels 2.5
Wireless Telecommunications Services 2.5
Automobiles 2.1
Beverages 1.9
Technology Hardware, Storage & Peripherals 1.9
Exploration & Production 1.8
Metals & Mining 1.5
Semiconductors 1.5
Thrifts & Mortgage Finance 1.5
Insurance 1.4
Railroad 1.4
Government Agencies 1.2
Tobacco 1.1
IT Services 1.0
Real Estate 1.0
Diversified Financial Services 0.9
Pipeline 0.9
Financial Services 0.8
Food & Beverage 0.8
Transportation Infrastructure 0.8
Construction Materials Manufacturing 0.7
Multiline Retail 0.7
Energy Equipment & Services 0.6
Hotels, Restaurants & Leisure 0.6
Household Products 0.6
Food Products 0.5
Specialty Retail 0.5
Utilities 0.5
Wireline Telecommunication Services 0.5
Internet Software & Services 0.4
Pharmaceuticals 0.4
Software & Services 0.4
Transportation & Logistics 0.4
Chemicals 0.3
Oil & Gas Services & Equipment 0.3
Entertainment Content 0.2
Home Improvement 0.2
Industrial Other 0.0*
-----------------------------------------------------
Total 100.0%
======
* Amount is less than 0.05%.
--------------------------------------------------------------------
% OF TOTAL
FIXED INCOME
CREDIT QUALITY(6) INVESTMENTS
--------------------------------------------------------------------
A 7.7%
A- 3.7
BBB+ 2.8
BBB 11.1
BBB- 24.0
BB+ 6.1
BB 12.0
BB- 5.9
B+ 8.7
B 10.1
B- 3.2
CCC 1.1
NR 3.6
--------------------------------------------------------------------
Total 100.0%
======
Page 3
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
SEMI-ANNUAL REPORT
JUNE 30, 2016 (UNAUDITED)
SUB-ADVISOR
Aberdeen Asset Management Inc. ("Aberdeen" or the "Sub-Advisor"), a Securities
and Exchange Commission registered investment advisor, is a wholly-owned
subsidiary of Aberdeen Asset Management PLC ("Aberdeen Group"). Aberdeen Group
is a publicly-traded international investment management group listed on the
London Stock Exchange, managing assets for both institutional and retail clients
from offices around the world.
PORTFOLIO MANAGEMENT TEAM
Investment decisions for the First Trust/Aberdeen Emerging Opportunity Fund (the
"Fund") are made by Aberdeen using a team approach and not by any one
individual. By making team decisions, Aberdeen seeks to ensure that the
investment process results in consistent returns across all portfolios with
similar objectives. Aberdeen does not employ separate research analysts.
Instead, Aberdeen's investment managers combine analysis with portfolio
management. Each member of the team has sector and portfolio responsibilities
such as day-to-day monitoring of liquidity. The overall result of this matrix
approach is a high degree of cross-coverage, leading to a deeper understanding
of the securities in which Aberdeen invests. Below are the members of the team
with significant responsibility for the day-to-day management of the Fund's
portfolio.
EQUITY MANAGEMENT TEAM FIXED-INCOME MANAGEMENT TEAM
DEVAN KALOO BRETT DIMENT
Head of Global Emerging Markets Equity Head of Emerging Market Debt
JOANNE IRVINE KEVIN DALY
Head of Global 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 14.78% and a market
value total return of 18.27% for the six months ended June 30, 2016 compared to
the Fund's blended index(2) total return of 10.24% 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, 2016
for these indices were as follows: the Barclays Capital Global Emerging Markets
Index was 9.06% and the FTSE All World Emerging Market Index was 8.07%.
An important factor impacting the return of the Fund relative to its blended
index was the 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 are rising. Unlike the Fund, the Barclays
Capital Global Emerging Markets Index, the FTSE All World Emerging Market Index,
and the components of the blended index are not leveraged. Leverage had a
positive impact on the performance of the Fund over this reporting period.
-----------------------------
(1) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in 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) The blended index consists of the following: JPMorgan Emerging Markets
Bond Index - Global Diversified (32.5%); JPMorgan Government Bond Index -
Emerging Markets Diversified (32.5%); MSCI Global Emerging Markets Index
(35.0%).
Page 4
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
SEMI-ANNUAL REPORT
JUNE 30, 2016 (UNAUDITED)
FIXED INCOME COMMENTARY
MARKET RECAP
During the six months ended June 30, 2016, low commodity prices and worries over
global growth initially weighed on emerging markets; however, risk sentiment
improved considerably as crude oil prices rose and it became likely that
monetary tightening in the US may not be as forthcoming as previously expected.
The positive market tone continued in the second quarter of the year resulting
in the primary market reopening. Investors shrugged off a disappointing
Organization of the Petroleum Exporting Countries ("OPEC") meeting in Doha in
April when the oil cartel failed to reach a deal to cut production. Emerging
market currencies gave back some of their earlier gains before recovering in
June after a weak non-farm payrolls print in the US at the beginning of June
came in much lower than consensus expected.
Finally, at the end of the period, news flow was dominated by Britain's surprise
referendum ("Brexit") result in favor of leaving the European Union ("EU"). The
decision for Brexit temporarily shocked financial markets and the sterling fell
by nearly 12% against the US dollar before paring back losses. Developed market
rates subsequently rallied significantly and risk markets sold off. As investors
began to digest the myriad of global economics and politics of the UK, Europe
and the globe, policymakers sought to reassure the market that they would keep
or even enhance the loose policy environment which has been a staple of monetary
policy since the Lehman crisis in 2008, and risky assets outperformed. We
believe the bigger test for emerging markets in the short term will be technical
and focused on how exchange-traded fund flows react, as these funds have been
the source of the majority of inflows in 2016 (according to the Institute of
International Finance) as cross-over investors increased their risk positioning
on the back of the rebound in commodity prices.
Over the six-month period, the JP Morgan Emerging Markets Bond Index - Global
Diversified returned 10.31% while its spread over U.S. Treasuries tightened by
27 basis points ("bps") to 388 bps. High-yield assets marginally outperformed
their investment-grade counterparts returning 10.25% and 10.22% respectively, as
commodity prices remained stable and risk sentiment improved. Ecuador, Brazil
and Venezuela were the top performers, while other commodity exporters such as
Iraq and Colombia also had strong returns. Belize was the worst performer during
the period as an adverse Moody's report was released warning of a possible
credit event in 2017. Mozambique also declined as it struggled to contain the
fallout over its hidden external debt obligations.
In local currency debt, the JP Morgan Government Bond Index - Emerging Markets
Diversified (unhedged in USD terms) returned 13.68% with positive returns
witnessed in both local rates and currencies. Brazil was the best performer as
the market reacted to improved balance of payments data and the start of a
policy rate cutting cycle, while Russia and Peru also had strong returns. Mexico
was the worst performer due to its currency depreciating over 6%, while eastern
European countries such as Poland, Romania and Hungary also underperformed.
PERFORMANCE ANALYSIS
The emerging market ("EM") debt portion of the Fund outperformed the EM debt
portion of the blended index over the period under review. In hard currency
debt, it benefited from overweight positions in Venezuela and Brazil as well as
underweight positioning in Lebanon, Hungary and Poland. On the other side,
selection effects in Kazakhstan, an off-blended index position in the United
Arab Emirates and an overweight in the Dominican Republic detracted from
performance. In local currency debt, overweights to Brazil and Russia were the
main contributors to the Fund's performance, while an underweight to Romania was
also beneficial. An underweight in Colombia detracted from the Fund, while
positioning in Uruguay inflation-linked bonds was also negative.
MARKET AND FUND OUTLOOK
In terms of issuance, the fact that this year has played out similarly to recent
years suggests that it is not the mainstream EM countries who are the main
drivers of new Eurobond issuance, but the high-yield nations. Investment-grade
credits are more focused on using their local bond market for their financing
needs rather than issuing debt in foreign currency, while high-yielding nations
do not yet have a sophisticated pension fund system, banking sector, asset
management industry or insurance industry which can absorb large amounts of
government treasury bonds or bills. With new bonds this year from such countries
as the Dominican Republic, Armenia, Tunisia and Gabon, we do expect this trend
in "frontier market" bond growth to continue. We believe the exogenous risks
surrounding Greece and US monetary policy will likely continue to keep risk
appetite subdued, although we do consider bond valuations attractive at this
point in time. Recent credit rating upgrades to Uruguay, Jamaica and an upwards
outlook revision in Malaysia indicate the improving nature of certain EM
countries.
Page 5
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
SEMI-ANNUAL REPORT
JUNE 30, 2016 (UNAUDITED)
EQUITY COMMENTARY
MARKET RECAP
Emerging market equities ended higher after a volatile six-month period. At
first, a sharp sell-off in Chinese shares and the continued slump in crude oil
prices triggered a renewed bout of risk aversion. However, the Bank of Japan's
surprise move to impose negative interest rates and a rebound in commodity
prices prompted a comeback. Subsequently, oil prices continued to stabilize,
while investors were also comforted by the US Federal Reserve (the "Fed")'s
delay in hiking rates. Towards the period end, Britain's vote to leave the EU
sent shockwaves across global markets and the pound crashed to a multi-year low.
Conversely, safe-haven assets such as the US treasuries, gold and the Japanese
yen rallied.
PERFORMANCE ANALYSIS
The Fund outperformed the blended index, driven by both positive allocation and
stock selection.
The Fund gained the most from its underweight position to China, as growth
concerns led to a 4.5% decline in the blended index. However, this was partially
offset by our Hong Kong holdings, Hang Lung and AIA Group. In Indonesia, the
Fund benefited from holding Astra International, as the group reported
encouraging vehicle sales. There was also broader appreciation at the passing of
a tax amnesty law, which should help the government approach its fiscal targets.
Thai lender Siam Commercial Bank was another outperformer as investors saw value
following a period of weakness. In India, lenders HDFC and ICICI Bank were
laggards, weighed down by soft economic data and contagion fears from the
reputed poor lending practices of state banks.
In Latin America, the Fund's overweight to Brazil was the key driver of
outperformance. The local market rose sharply in the run-up to president Dilma
Rousseff's impeachment and extended its rally in response to president Michel
Temer's ambitious program of reforms to buttress the country's public finances.
At the stock level, Banco Bradesco, Ultrapar, Lojas Renner and Multiplan were
the top contributors to relative performance.
The Europe, Middle East and Africa region also added to relative performance
with allocation being the main contributor. Turkish shares ended higher over the
review period despite regional geopolitical instability. The Fund's holdings
there, such as lenders Akbank and Garanti, as well as hard-discount retailer
BIM, contributed to relative performance.
MARKET OUTLOOK
Following the Brexit vote, we believe cautious sentiment is likely to dominate
trading as investors monitor developments as they unfold. While the Fund's EM
portfolio has limited direct exposure to the UK, a more pressing concern might
be the implications of Brexit on Europe, both in terms of sentiment as well as
from the perspective of creating new political fault lines within the EU, which
could impact expectations for global growth. Given these uncertainties, we
believe the Fed could further delay its rate hikes. Meanwhile, central banks
from Europe to Japan have also indicated that they may be compelled to ease
monetary policy further if needed.
More importantly, we believe fundamentals are still improving across emerging
economies, underpinned by solid growth potential. Easing monetary policy could
also provide some stimulus over the coming months. At the corporate level, we
are encouraged by signs that the earnings cycle seems to be now turning for the
better amid stabilizing top lines and commendable cost control. As bottom-up
stock pickers, we stand by our strategy to invest in high-quality companies and
continue to find opportunities amid attractive valuations.
Page 6
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a)
JUNE 30, 2016 (UNAUDITED)
SHARES DESCRIPTION VALUE
-------------- ----------------------------------------------------------------------------------------- ------------
COMMON STOCKS - 43.0%
BRAZIL - 4.7%
142,056 Banco Bradesco S.A., ADR................................................................. $ 1,109,457
31,800 BRF S.A.................................................................................. 443,990
83,000 Lojas Renner S.A......................................................................... 614,174
25,454 Multiplan Empreendimentos Imobiliarios S.A., Preference Shares........................... 477,020
45,267 Ultrapar Participacoes S.A............................................................... 1,000,516
59,604 Vale S.A., ADR........................................................................... 301,596
58,842 Vale S.A., Preference Shares, ADR........................................................ 235,957
------------
4,182,710
------------
CHILE - 0.5%
24,459 Banco Santander Chile S.A., ADR.......................................................... 473,771
------------
CHINA - 1.9%
106,000 China Mobile Ltd. (b).................................................................... 1,224,747
692,000 PetroChina Co., Ltd., Class H (b)........................................................ 476,953
------------
1,701,700
------------
HONG KONG - 3.5%
221,000 AIA Group Ltd. (b)....................................................................... 1,329,033
202,000 Hang Lung Group Ltd. (b)................................................................. 608,589
17,079 Hong Kong Exchanges and Clearing Ltd. (b)................................................ 416,140
283,000 Swire Pacific Ltd., B Shares (b)......................................................... 560,920
54,600 Swire Properties Ltd. (b)................................................................ 145,476
------------
3,060,158
------------
HUNGARY - 0.5%
21,000 Richter Gedeon Nyrt (b).................................................................. 417,692
------------
INDIA - 7.1%
12,000 Grasim Industries Ltd. (b)............................................................... 831,351
11,000 Hero MotoCorp Ltd. (b)................................................................... 519,511
43,000 Hindustan Unilever Ltd. (b).............................................................. 573,557
75,500 Housing Development Finance Corp., Ltd. (b).............................................. 1,406,606
200,000 ICICI Bank Ltd. (b)...................................................................... 715,825
49,472 Infosys Ltd. (b)......................................................................... 858,556
184,173 ITC Ltd. (b)............................................................................. 1,008,327
1,900 Tata Consultancy Services Ltd. (b)....................................................... 72,008
5,428 UltraTech Cement Ltd. (b)................................................................ 275,104
------------
6,260,845
------------
INDONESIA - 2.3%
2,586,100 Astra International Tbk PT (b)........................................................... 1,457,945
423,400 Indocement Tunggal Prakarsa Tbk PT (b)................................................... 544,508
------------
2,002,453
------------
ITALY - 0.7%
19,900 Tenaris S.A., ADR........................................................................ 573,916
------------
MALAYSIA - 0.8%
170,542 CIMB Group Holdings Bhd (b).............................................................. 185,500
105,000 Public Bank Bhd (b)...................................................................... 505,938
------------
691,438
------------
See Notes to Financial Statements Page 7
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
JUNE 30, 2016 (UNAUDITED)
SHARES DESCRIPTION VALUE
-------------- ----------------------------------------------------------------------------------------- ------------
COMMON STOCKS (CONTINUED)
MEXICO - 3.6%
12,700 Fomento Economico Mexicano, S.A.B. de C.V., ADR.......................................... $ 1,174,623
16,500 Grupo Aeroportuario del Centro Norte, S.A.B. de C.V., ADR................................ 782,760
211,200 Grupo Financiero Banorte, S.A.B. de C.V., O Shares....................................... 1,180,383
------------
3,137,766
------------
PHILIPPINES - 1.9%
1,189,000 Ayala Land, Inc. (b)..................................................................... 986,306
325,359 Bank of the Philippine Islands (b)....................................................... 673,704
------------
1,660,010
------------
POLAND - 0.6%
16,196 Bank Pekao S.A. (b)...................................................................... 565,472
------------
PORTUGAL - 0.5%
29,692 Jeronimo Martins SGPS S.A. (b)........................................................... 468,297
------------
RUSSIA - 1.8%
19,500 Lukoil PJSC, ADR......................................................................... 813,735
5,496 Magnit PJSC (b).......................................................................... 775,031
------------
1,588,766
------------
SOUTH AFRICA - 2.4%
18,000 BHP Billiton PLC (b)..................................................................... 224,441
48,610 Massmart Holdings Ltd. (b)............................................................... 415,233
40,215 MTN Group Ltd. (b)....................................................................... 390,825
9,899 SABMiller PLC (b)........................................................................ 572,681
85,729 Truworths International Ltd. (b)......................................................... 498,894
------------
2,102,074
------------
SOUTH KOREA - 2.8%
2,500 E-Mart, Inc. (b)......................................................................... 377,257
518 NAVER Corp. (b).......................................................................... 320,909
1,700 Samsung Electronics Co., Ltd., Preference Shares (b)..................................... 1,753,699
------------
2,451,865
------------
TAIWAN - 2.0%
108,005 Taiwan Mobile Co., Ltd. (b).............................................................. 377,504
270,954 Taiwan Semiconductor Manufacturing Co., Ltd. (b)......................................... 1,365,526
------------
1,743,030
------------
THAILAND - 2.1%
67,200 Siam Cement Public (The) Co., Ltd. (b)................................................... 912,692
230,600 Siam Commercial Bank Public Co., Ltd. (b)................................................ 916,748
------------
1,829,440
------------
TURKEY - 2.2%
188,635 Akbank TAS (b)........................................................................... 540,649
27,444 BIM Birlesik Magazalar A.S. (b).......................................................... 535,222
115,150 Haci Omer Sabanci Holding AS (b)......................................................... 377,900
192,000 Turkiye Garanti Bankasi AS (b)........................................................... 507,155
------------
1,960,926
------------
UNITED KINGDOM - 0.5%
57,039 Standard Chartered PLC (b)............................................................... 432,756
------------
UNITED STATES - 0.6%
6,500 Yum! Brands, Inc......................................................................... 538,980
------------
TOTAL COMMON STOCKS...................................................................... 37,844,065
(Cost $31,818,380) ------------
Page 8 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
JUNE 30, 2016 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- ------------------------------------------------------------- ---------- -------------- ------------
FOREIGN SOVEREIGN BONDS AND NOTES - 47.0%
ARGENTINA - 3.3%
1,076,000 Argentine Republic Government
International Bond (USD) (c).............................. 7.50% 04/22/26 $ 1,165,846
630,917 Argentine Republic Government
International Bond (USD).................................. 8.28% 12/31/33 706,627
518,754 Argentine Republic Government
International Bond (USD).................................. 8.28% 12/31/33 573,223
464,000 Argentine Republic Government
International Bond (USD) (c).............................. 7.13% 07/06/36 464,000
------------
2,909,696
------------
ARMENIA - 0.5%
396,000 Armenia International Bond (USD) (c)......................... 6.00% 09/30/20 400,443
------------
AZERBAIJAN - 0.5%
422,000 Southern Gas Corridor CJSC (USD) (c)......................... 6.88% 03/24/26 456,815
------------
BRAZIL - 4.6%
14,400,000 Brazil Notas do Tesouro Nacional, Series F (BRL)............. 10.00% 01/01/25 4,033,343
------------
COLOMBIA - 0.3%
240,000 Colombia Government International Bond (USD)................. 4.50% 01/28/26 256,500
------------
COSTA RICA - 0.3%
300,000 Costa Rica Government International Bond (USD)............... 4.25% 01/26/23 287,250
------------
EGYPT - 0.3%
340,000 Egypt Government International Bond (USD) (c)................ 5.88% 06/11/25 299,200
------------
ETHIOPIA - 0.8%
790,000 Ethiopia International Bond (USD) (c)........................ 6.63% 12/11/24 740,625
------------
GHANA - 1.2%
1,850,000 Ghana Government Bond (GHS).................................. 23.00% 08/21/17 465,935
300,000 Ghana Government International Bond (USD).................... 8.13% 01/18/26 259,080
350,000 Ghana Government International Bond (USD) (c)................ 8.13% 01/18/26 302,260
------------
1,027,275
------------
HONDURAS - 0.5%
410,000 Honduras Government International Bond (USD) (c)............. 7.50% 03/15/24 446,900
------------
HUNGARY - 0.7%
144,650,000 Hungary Government Bond (HUF)................................ 5.50% 06/24/25 606,720
------------
INDONESIA - 3.5%
470,000 Indonesia Government International Bond (USD) (c)............ 5.88% 01/15/24 545,302
9,131,000,000 Indonesia Treasury Bond (IDR)................................ 5.25% 05/15/18 669,319
17,457,000,000 Indonesia Treasury Bond (IDR)................................ 8.38% 03/15/34 1,407,126
440,000 Pertamina Persero PT (USD) (c)............................... 4.30% 05/20/23 448,416
------------
3,070,163
------------
IRAQ - 0.8%
880,000 Iraq International Bond (USD)................................ 5.80% 01/15/28 673,200
------------
IVORY COAST - 0.5%
465,300 Ivory Coast Government International Bond (USD).............. 5.75% 12/31/32 434,339
------------
See Notes to Financial Statements Page 9
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
JUNE 30, 2016 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- ------------------------------------------------------------- ---------- -------------- ------------
FOREIGN SOVEREIGN BONDS AND NOTES (CONTINUED)
JAMAICA - 0.6%
477,000 Jamaica Government International Bond (USD).................. 7.88% 07/28/45 $ 510,390
------------
KAZAKHSTAN - 1.0%
480,000 KazMunayGas National Co., JSC (USD).......................... 9.13% 07/02/18 534,000
353,000 KazMunayGas National Co., JSC (USD).......................... 7.00% 05/05/20 386,020
------------
920,020
------------
KENYA - 0.2%
200,000 Kenya Government International Bond (USD).................... 6.88% 06/24/24 185,514
------------
MEXICO - 1.8%
3,850,000 Mexican Bonos (MXN).......................................... 6.50% 06/09/22 220,419
20,380,000 Mexican Bonos (MXN).......................................... 8.50% 11/18/38 1,390,524
------------
1,610,943
------------
MONGOLIA - 0.7%
700,000 Mongolia Government International Bond (USD)................. 5.13% 12/05/22 577,084
------------
PARAGUAY - 0.2%
200,000 Paraguay Government International Bond (USD) (c)............. 5.00% 04/15/26 211,500
------------
PERU - 2.3%
6,320,000 Peruvian Government International Bond (PEN)................. 6.90% 08/12/37 2,035,161
------------
POLAND - 2.7%
4,050,000 Poland Government Bond (PLN)................................. 4.75% 04/25/17 1,052,817
4,870,000 Poland Government Bond (PLN)................................. 4.00% 10/25/23 1,350,419
------------
2,403,236
------------
ROMANIA - 1.7%
1,890,000 Romania Government Bond (RON)................................ 5.80% 07/26/27 548,862
810,000 Romanian Government International Bond (USD)................. 6.75% 02/07/22 960,417
------------
1,509,279
------------
RUSSIA - 5.6%
323,100,000 Russian Federal Bond - OFZ (RUB)............................. 7.05% 01/19/28 4,653,378
200,000 Russian Foreign Bond - Eurobond (USD)........................ 5.88% 09/16/43 234,264
------------
4,887,642
------------
RWANDA - 0.6%
300,000 Rwanda International Government Bond (USD)................... 6.63% 05/02/23 292,560
200,000 Rwanda International Government Bond (USD) (c)............... 6.63% 05/02/23 195,040
------------
487,600
------------
SENEGAL - 0.5%
380,000 Senegal Government International Bond (USD).................. 8.75% 05/13/21 417,050
------------
SOUTH AFRICA - 4.9%
710,000 Eskom Holdings SOC Ltd. (USD) (c)............................ 6.75% 08/06/23 703,610
20,053,023 South Africa Government Bond (ZAR)........................... 10.50% 12/21/26 1,516,026
10,260,000 South Africa Government Bond (ZAR)........................... 8.00% 01/31/30 632,390
23,520,000 South Africa Government Bond (ZAR)........................... 6.25% 03/31/36 1,150,984
260,000 South Africa Government International Bond (USD)............. 4.88% 04/14/26 270,237
------------
4,273,247
------------
TANZANIA - 0.3%
266,667 Tanzania Government International Bond (USD) (d)............. 6.89% 03/09/20 274,000
------------
Page 10 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
JUNE 30, 2016 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- ------------------------------------------------------------- ---------- -------------- ------------
FOREIGN SOVEREIGN BONDS AND NOTES (CONTINUED)
TURKEY - 3.6%
1,750,000 Turkey Government Bond (TRY)................................. 6.30% 02/14/18 $ 589,519
5,390,000 Turkey Government Bond (TRY)................................. 10.40% 03/20/24 2,018,088
860,000 Turkey Government Bond (TRY)................................. 8.00% 03/12/25 281,484
260,000 Turkey Government International Bond (USD)................... 6.25% 09/26/22 294,581
------------
3,183,672
------------
UKRAINE - 1.5%
297,000 Ukraine Government International Bond (USD) (c).............. 7.75% 09/01/20 291,802
115,000 Ukraine Government International Bond (USD) (c).............. 7.75% 09/01/21 112,413
865,000 Ukraine Government International Bond (USD) (c).............. 7.75% 09/01/24 831,373
188,000 Ukraine Government International Bond (USD) (c).............. 0.00% 05/31/40 61,335
------------
1,296,923
------------
URUGUAY - 0.2%
158,000 Uruguay Government International Bond (USD).................. 7.63% 03/21/36 214,288
------------
VENEZUELA - 0.4%
720,000 Venezuela Government International Bond (USD)................ 7.75% 10/13/19 325,800
------------
ZAMBIA - 0.4%
440,000 Zambia Government International Bond (USD) (c)............... 8.97% 07/30/27 382,800
------------
TOTAL FOREIGN SOVEREIGN BONDS AND NOTES.................................................. 41,348,618
(Cost $41,106,330) ------------
FOREIGN CORPORATE BONDS AND NOTES (e) - 15.4%
ARGENTINA - 0.2%
150,000 Cablevision SA (USD) (c)..................................... 6.50% 06/15/21 153,375
------------
BANGLADESH - 0.3%
250,000 Banglalink Digital Communications Ltd. (USD) (c)............. 8.63% 05/06/19 263,750
------------
BARBADOS - 0.3%
250,000 Sagicor Finance 2015 Ltd. (USD) (c).......................... 8.88% 08/11/22 279,250
------------
BRAZIL - 3.1%
247,000 Caixa Economica Federal (USD)................................ 4.25% 05/13/19 243,295
414,000 Marfrig Overseas Ltd. (USD).................................. 9.50% 05/04/20 427,861
350,000 OAS Finance Ltd. (USD) (f) (g) (h) (i)....................... 8.88% (j) 5,775
200,000 OAS Investments GmbH (USD) (f) (g) (i)....................... 8.25% 10/19/19 1,020
180,000 Petrobras Global Finance BV (USD)............................ 5.75% 01/20/20 174,348
795,000 Petrobras Global Finance BV (USD)............................ 5.38% 01/27/21 730,168
650,000 Petrobras Global Finance BV (USD)............................ 8.75% 05/23/26 654,875
356,872 QGOG Atlantic/Alaskan Rigs Ltd. (USD)........................ 5.25% 07/30/18 290,850
166,000 Vale Overseas Ltd. (USD)..................................... 4.38% 01/11/22 155,990
------------
2,684,182
------------
DOMINICAN REPUBLIC - 0.5%
460,000 AES Andres BV / Domincan Power Partners / Empresa
Generadora De Electricidad It (USD) (c)................... 7.95% 05/11/26 480,125
------------
GEORGIA - 1.3%
350,000 Georgian Oil and Gas Corp. JSC (USD) (c)..................... 6.75% 04/26/21 362,250
680,000 Georgian Railway JSC (USD)................................... 7.75% 07/11/22 753,100
------------
1,115,350
------------
See Notes to Financial Statements Page 11
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
JUNE 30, 2016 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- ------------------------------------------------------------- ---------- -------------- ------------
FOREIGN CORPORATE BONDS AND NOTES (e) (CONTINUED)
GUATEMALA - 1.0%
400,000 Comcel Trust via Comunicaciones Celulares SA (USD) (c)....... 6.88% 02/06/24 $ 392,000
500,000 Industrial Subordinated Trust (USD).......................... 8.25% 07/27/21 528,750
------------
920,750
------------
HONG KONG - 0.3%
260,000 Shimao Property Holdings Ltd. (USD).......................... 8.38% 02/10/22 294,045
------------
INDIA - 0.3%
260,000 ICICI Bank Ltd. (USD) (h).................................... 6.38% 04/30/22 263,863
------------
KAZAKHSTAN - 1.4%
480,000 Kazakhstan Temir Zholy Finance BV (USD)...................... 6.38% 10/06/20 502,800
800,000 Zhaikmunai LLP (USD) (c)..................................... 7.13% 11/13/19 704,000
------------
1,206,800
------------
MEXICO - 2.1%
270,000 Alfa SAB de CV (USD)......................................... 6.88% 03/25/44 280,125
430,000 Cemex SAB de CV (USD) (c).................................... 7.75% 04/16/26 452,188
4,800,000 Petroleos Mexicanos (MXN).................................... 7.19% 09/12/24 237,731
400,000 Sixsigma Networks Mexico S.A. de CV (USD) (c)................ 8.25% 11/07/21 400,000
490,000 Unifin Financiera SAPI de CV SOFOM ENR (USD)................. 6.25% 07/22/19 483,140
------------
1,853,184
------------
NETHERLANDS - 0.2%
200,000 GTH Finance BV (USD) (c)..................................... 7.25% 04/26/23 209,000
------------
NIGERIA - 0.4%
400,000 Zenith Bank PLC (USD) (c).................................... 6.25% 04/22/19 378,000
------------
PARAGUAY - 0.4%
350,000 Banco Regional SAECA (USD) (c)............................... 8.13% 01/24/19 368,813
------------
PERU - 0.2%
200,000 Union Andina de Cementos SAA (USD)........................... 5.88% 10/30/21 203,200
------------
RUSSIA - 1.7%
430,000 Evraz Group S.A. (USD) (c)................................... 6.50% 04/22/20 440,213
338,000 Global Ports Finance PLC (USD) (c)........................... 6.87% 01/25/22 350,253
350,000 Lukoil International Finance BV (USD)........................ 4.56% 04/24/23 355,153
310,000 Sberbank of Russia Via SB Capital S.A. (USD)................. 6.13% 02/07/22 343,500
------------
1,489,119
------------
TURKEY - 0.6%
200,000 Arcelik AS (USD) (c)......................................... 5.00% 04/03/23 198,550
300,000 Yasar Holdings AS (USD) (c).................................. 8.88% 05/06/20 319,560
------------
518,110
------------
UNITED ARAB EMIRATES - 0.8%
600,000 Jafz Sukuk Ltd. (USD)........................................ 7.00% 06/19/19 671,250
------------
VENEZUELA - 0.3%
253,333 Petroleos de Venezuela S.A. (USD)............................ 8.50% 11/02/17 177,847
270,000 Petroleos de Venezuela S.A. (USD)............................ 9.00% 11/17/21 116,707
------------
294,554
------------
TOTAL FOREIGN CORPORATE BONDS AND NOTES.................................................. 13,646,720
(Cost $13,763,355) ------------
Page 12 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2016 (UNAUDITED)
DESCRIPTION VALUE
----------------------------------------------------------------------------------------- ------------
TOTAL INVESTMENTS - 105.4%............................................................... $ 92,839,403
(Cost $86,688,065) (k)
OUTSTANDING LOANS - (6.6%)............................................................... (5,800,000)
NET OTHER ASSETS AND LIABILITIES - 1.2%.................................................. 1,093,883
------------
NET ASSETS - 100.0%...................................................................... $ 88,133,286
============
-----------------------------
(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, 2016, securities noted as such are valued at
$28,123,187 or 31.9% of net assets. Certain of these securities are fair
valued using a factor provided by an independent pricing service due to
the change in value between the foreign markets' close and the NYSE close
exceeding a certain threshold. On days when this threshold is not
exceeded, these securities are typically valued at the last sale price on
the exchange on which they are principally traded.
(c) 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 Aberdeen Asset Management Inc., the Fund's
investment sub-advisor. Although market instability can result in periods
of increased overall market illiquidity, liquidity for each security is
determined based on security specific factors and assumptions, which
require subjective judgement. At June 30, 2016, securities noted as such
amounted to $13,811,007 or 15.7% of net assets.
(d) Floating rate security. The interest rate shown reflects the rate in
effect at June 30, 2016.
(e) Portfolio securities are included in a country based upon their underlying
credit exposure as determined by Aberdeen Asset Management Inc., the
Fund's investment sub-advisor.
(f) This issuer is in default and interest is not being accrued by the Fund
nor paid by the issuer.
(g) This issuer has filed for bankruptcy protection in a Sao Paulo state
court.
(h) Fixed-to-floating or fixed-to-variable rate security. The interest rate
shown reflects the fixed rate in effect at June 30, 2016. At a
predetermined date, the fixed rate will change to a floating rate or a
variable rate.
(i) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under 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 the Financial Statements).
(j) Perpetual maturity.
(k) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of June 30, 2016, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $13,528,348 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $7,377,010.
ADR American Depositary Receipt
Currency Abbreviations:
BRL Brazilian Real
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
RON Romanian Leu
RUB Russian Ruble
THB Thailand Baht
TRY Turkish Lira
TWD Taiwan New Dollar
USD United States Dollar
ZAR South African Rand
See Notes to Financial Statements Page 13
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2016 (UNAUDITED)
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of June 30, 2016
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
6/30/2016 PRICES INPUTS INPUTS
--------------------------------------------------- ------------ ------------ -------------- ------------
Common Stocks:
Brazil........................................ $ 4,182,710 $ 4,182,710 $ -- $ --
Chile......................................... 473,771 473,771 -- --
Italy......................................... 573,916 573,916 -- --
Mexico........................................ 3,137,766 3,137,766 -- --
Russia........................................ 1,588,766 813,735 775,031 --
United States................................. 538,980 538,980 -- --
Other Country Categories*..................... 27,348,156 -- 27,348,156 --
------------ ------------ -------------- ------------
Total Common Stocks........................ 37,844,065 9,720,878 28,123,187 --
------------ ------------ -------------- ------------
Foreign Sovereign Bonds and Notes*................. 41,348,618 -- 41,348,618 --
Foreign Corporate Bonds and Notes*................. 13,646,720 -- 13,646,720 --
------------ ------------ -------------- ------------
Total Investments.................................. $ 92,839,403 $ 9,720,878 $ 83,118,525 $ --
------------ ------------ -------------- ------------
Forward Foreign Currency Contracts**............... 114,136 -- 114,136 --
------------ ------------ -------------- ------------
Total.............................................. $ 92,953,539 $ 9,720,878 $ 83,232,661 $ --
============ ============ ============== ============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
6/30/2016 PRICES INPUTS INPUTS
--------------------------------------------------- ------------ ------------ -------------- ------------
Forward Foreign Currency Contracts**............... $ (26,747) $ -- $ (26,747) $ --
============ ============ ============== ============
* See Portfolio of Investments for country breakout.
** See the Forward Foreign Currency Contracts table for contract and currency
detail.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at June 30, 2016.
Page 14 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2016 (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) JUNE 30, 2016 JUNE 30, 2016 (DEPRECIATION)
------------ ------------ --------------------- ------------------- ----------------- ----------------- --------------
07/14/16 CIT USD 9,809 MXN 183,588 $ 9,809 $ 10,037 $ (228)
07/14/16 CIT MXN 86,963 USD 4,646 4,754 4,646 108
07/14/16 CIT MXN 8,244,000 USD 474,245 450,336 474,245 (23,909)
07/14/16 GS MXN 1,817,000 USD 98,080 99,255 98,080 1,175
07/14/16 CIT USD 2,381,518 MXN 42,754,000 2,381,518 2,335,474 46,044
07/14/16 JPM MXN 32,693,000 USD 1,719,074 1,785,883 1,719,074 66,809
08/26/16 JPM INR 32,218,000 USD 475,192 472,582 475,192 (2,610)
--------------
Net Unrealized Appreciation (Depreciation).................................................................. $ 87,389
==============
(a) Please see Portfolio of Investments for currency descriptions.
See Note 2D - Offsetting on the Statement of Assets and Liabilities in the Notes
to Financial Statements for a table that presents the forward foreign currency
contracts' assets and liability on a gross basis.
Counterparty Abbreviations:
CIT Citibank, NA
GS Goldman Sachs
JPM JPMorgan Chase
CURRENCY EXPOSURE % OF TOTAL
DIVERSIFICATION INVESTMENTS +
--------------------------------------------------
USD 38.5%
INR 7.2
BRL 7.1
RUB 5.8
ZAR 5.8
TRY 5.2
HKD 5.1
IDR 4.4
MXN 3.3
PLN 3.2
KRW 2.6
PEN 2.2
THB 2.0
TWD 1.9
PHP 1.8
HUF 1.1
MYR 0.7
RON 0.6
EUR 0.5
GHS 0.5
GBP 0.5
--------------------------------------------------
Total 100.0%
======
+ The weightings include the impact of currency forwards.
See Notes to Financial Statements Page 15
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2016 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $86,688,065).......................................................................... $ 92,839,403
Cash........................................................................................... 482,700
Foreign currency (Cost $54,558)................................................................ 54,512
Unrealized appreciation on forward foreign currency contracts.................................. 114,136
Receivables:
Interest.................................................................................... 1,232,286
Dividends................................................................................... 157,680
Investment securities sold.................................................................. 90,508
Miscellaneous............................................................................... 40,381
Dividend reclaims........................................................................... 4,833
Prepaid expenses............................................................................... 7,842
------------
Total Assets................................................................................ 95,024,281
------------
LIABILITIES:
Outstanding loan............................................................................... 5,800,000
Unrealized depreciation on forward foreign currency contracts.................................. 26,747
Payables:
Investment securities purchased............................................................. 766,174
Deferred foreign capital gains tax.......................................................... 128,493
Investment advisory fees.................................................................... 75,754
Audit and tax fees.......................................................................... 32,198
Custodian fees.............................................................................. 24,223
Administrative fees......................................................................... 13,908
Printing fees............................................................................... 12,922
Transfer agent fees......................................................................... 4,252
Legal fees.................................................................................. 1,348
Financial reporting fees.................................................................... 771
Interest and fees on loan................................................................... 224
Trustees' fees and expenses................................................................. 152
Other liabilities.............................................................................. 3,829
------------
Total Liabilities........................................................................... 6,890,995
------------
NET ASSETS..................................................................................... $ 88,133,286
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $ 84,302,541
Par value...................................................................................... 52,515
Accumulated net investment income (loss)....................................................... (2,004,360)
Accumulated net realized gain (loss) on investments, forward foreign currency
contracts and foreign currency transactions................................................. (356,142)
Net unrealized appreciation (depreciation) on investments, forward foreign
currency contracts and foreign currency translation.......................................... 6,138,732
------------
NET ASSETS..................................................................................... $ 88,133,286
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)........................... $ 16.78
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 5,251,569
============
Page 16 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2016 (UNAUDITED)
INVESTMENT INCOME:
Interest (net of foreign withholding tax of $5,453)............................................ $ 1,846,932
Dividends (net of foreign withholding tax of $65,847).......................................... 599,647
Other.......................................................................................... 748
------------
Total investment income..................................................................... 2,447,327
------------
EXPENSES:
Investment advisory fees....................................................................... 440,679
Custodian fees................................................................................. 82,913
Interest and fees on loan...................................................................... 39,666
Administrative fees............................................................................ 37,836
Audit and tax fees............................................................................. 30,642
Foreign capital gains tax...................................................................... 23,727
Printing fees.................................................................................. 18,781
Transfer agent fees............................................................................ 17,820
Trustees' fees and expenses.................................................................... 8,940
Financial reporting fees....................................................................... 4,625
Legal fees..................................................................................... 2,739
Other.......................................................................................... 21,216
------------
Total expenses.............................................................................. 729,584
------------
NET INVESTMENT INCOME (LOSS)................................................................... 1,717,743
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments................................................................................. 1,519,619
Forward foreign currency contracts.......................................................... (110,401)
Foreign currency transactions............................................................... (1,698,977)
------------
Net realized gain (loss)....................................................................... (289,759)
------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................................. 9,628,357
Forward foreign currency contracts.......................................................... 52,621
Foreign currency translation................................................................ 53,368
Net change in deferred foreign capital gains tax............................................... (14,383)
------------
Net change in unrealized appreciation (depreciation)........................................... 9,719,963
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ 9,430,204
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 11,147,947
============
See Notes to Financial Statements Page 17
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE
SIX MONTHS FOR THE
ENDED YEAR
6/30/2016 ENDED
(UNAUDITED) 12/31/2015
------------- -------------
OPERATIONS:
Net investment income (loss)...................................................... $ 1,717,743 $ 3,451,751
Net realized gain (loss).......................................................... (289,759) (4,563,042)
Net change in unrealized appreciation (depreciation).............................. 9,719,963 (8,823,189)
------------- -------------
Net increase (decrease) in net assets resulting from operations................... 11,147,947 (9,934,480)
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................. (3,678,870) --
Return of capital................................................................. -- (7,445,649)
------------- -------------
Total distributions to shareholders............................................... (3,678,870) (7,445,649)
------------- -------------
CAPITAL TRANSACTIONS:
Repurchase of Common Shares....................................................... (480,654) (527,625)
------------- -------------
Net increase (decrease) in net assets resulting from capital transactions......... (480,654) (527,625)
------------- -------------
Total increase (decrease) in net assets........................................... 6,988,423 (17,907,754)
NET ASSETS:
Beginning of period............................................................... 81,144,863 99,052,617
------------- -------------
End of period..................................................................... $ 88,133,286 $ 81,144,863
============= =============
Accumulated net investment income (loss) at end of period......................... $ (2,004,360) $ (43,233)
============= =============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period.............................................. 5,289,339 5,327,785
Common Shares repurchased*........................................................ (37,770) (38,446)
------------- -------------
Common Shares at end of period.................................................... 5,251,569 5,289,339
============= =============
-----------------------------
* On September 15, 2015, the Fund commenced a Share Repurchase Program. The
program originally expired on March 15, 2016, but on March 15, 2016, the
Fund announced that the Board of Trustees authorized the continuation of
the Share Repurchase Program. For the six months ended June 30, 2016, and
the year ended December 31, 2015, the Fund repurchased 37,770 and 38,446
of its shares, respectively, at a weighted-average discount of 15.16% and
15.14%, respectively, from net asset value per share. The Fund expects to
repurchase its outstanding shares until the earlier of (i) the repurchase
of an additional 190,173 common shares (for an aggregate of 266,389), or
(ii) September 15, 2016.
Page 18 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2016 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations................. $ 11,147,947
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by operating activities:
Purchases of investments.................................................. (29,489,418)
Sales, maturities and paydowns of investments............................. 32,414,183
Net amortization/accretion of premiums/discounts on investments........... (92,696)
Net realized gain/loss on investments..................................... (1,519,619)
Net realized gain/loss on foreign currency transactions (a)............... 1,800,786
Net change in unrealized appreciation/depreciation on forward foreign
currency contracts...................................................... (52,621)
Net change in unrealized appreciation/depreciation on investments......... (9,628,357)
CHANGES IN ASSETS AND LIABILITIES:
Increase in interest receivable........................................... (243,056)
Increase in dividend reclaim receivable................................... (2,332)
Increase in dividends receivable.......................................... (56,002)
Increase in prepaid expenses.............................................. (6,950)
Decrease in interest and fees on loan payable............................. (5,798)
Increase in investment advisory fees payable.............................. 142
Decrease in audit and tax fees payable.................................... (26,002)
Decrease in legal fees payable............................................ (85)
Decrease in printing fees payable......................................... (1,339)
Increase in administrative fees payable................................... 1,438
Decrease in custodian fees payable........................................ (16,716)
Decrease in transfer agent fees payable................................... (1,266)
Increase in Trustees' fees and expenses payable........................... 102
Increase in deferred foreign capital gains tax............................ 14,383
Increase in other liabilities payable..................................... 1,441
-------------
CASH USED IN OPERATING ACTIVITIES............................................... $ 4,238,165
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of Common Shares............................................... (480,654)
Distributions to Common Shareholders from net investment income........... (3,678,870)
-------------
CASH USED IN FINANCING ACTIVITIES............................................... (4,159,524)
-------------
Increase in cash and foreign currency (b)....................................... 78,641
Cash and foreign currency at beginning of period................................ 458,571
-------------
CASH AND FOREIGN CURRENCY AT END OF PERIOD...................................... $ 537,212
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees............................... $ 45,464
=============
-----------------------------
(a) This amount is a component of net realized gain/(loss) on foreign currency
transactions as shown on the Statement of Operations
(b) Includes net change in unrealized appreciation (depreciation) on foreign
currency of $53,368.
See Notes to Financial Statements Page 19
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
6/30/2016 -------------------------------------------------------------------
(UNAUDITED) 2015 2014 2013 2012 2011
----------- ----------- ----------- ----------- ----------- -----------
Net asset value, beginning of period....... $ 15.34 $ 18.59 $ 20.61 $ 23.67 $ 20.30 $ 22.77
--------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)............... 0.33 0.65 0.77 0.79 0.90 0.98
Net realized and unrealized gain (loss).... 1.79 (2.52) (1.39) (2.45) 3.87 (2.05)
--------- --------- --------- --------- --------- ---------
Total from investment operations........... 2.12 (1.87) (0.62) (1.66) 4.77 (1.07)
--------- --------- --------- --------- --------- ---------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income...................... (0.70) -- (0.32) (0.76) (0.88) (0.74)
Net realized gain.......................... -- -- (0.44) (0.64) (0.52) (0.66)
Return of capital.......................... -- (1.40) (0.64) -- -- --
--------- --------- --------- --------- --------- ---------
Total from distributions................... (0.70) (1.40) (1.40) (1.40) (1.40) (1.40)
--------- --------- --------- --------- --------- ---------
Common share repurchases................... 0.02 0.02 -- -- -- --
--------- --------- --------- --------- --------- ---------
Net asset value, end of period............. $ 16.78 $ 15.34 $ 18.59 $ 20.61 $ 23.67 $ 20.30
========= ========= ========= ========= ========= =========
Market value, end of period................ $ 14.72 $ 13.06 $ 16.45 $ 18.05 $ 22.05 $ 17.82
========= ========= ========= ========= ========= =========
TOTAL RETURN BASED ON NET ASSET VALUE (a).. 14.78% (9.16)% (2.49)% (6.49)% 24.36% (4.18)%
========= ========= ========= ========= ========= =========
TOTAL RETURN BASED ON MARKET VALUE (a)..... 18.27% (12.61)% (1.47)% (12.13)% 32.02% (10.17)%
========= ========= ========= ========= ========= =========
-----------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)....... $ 88,133 $ 81,145 $ 99,053 $ 109,813 $ 126,093 $ 108,174
Ratio of expenses to average net assets.... 1.77% (b) 1.69% 1.71% 1.75% 1.78% 1.68%
Ratio of total expenses to average net
assets excluding interest expense....... 1.68% (b) 1.62% 1.64% 1.68% 1.70% 1.61%
Ratio of net investment income (loss) to
average net assets...................... 4.17% (b) 3.66% 3.73% 3.57% 4.04% 4.47%
Portfolio turnover rate.................... 33% 44% 48% 50% 49% 51%
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 (c)........................ $ 16,195 $ 14,990 $ 18,078 $ 19,933 $ 22,740 $ 19,651
-----------------------------
(a) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in net asset value per share
for net asset value returns and changes in Common Share Price for market
value returns. Total returns do not reflect sales load and are not
annualized for periods less than one year. Past performance is not
indicative of future results.
(b) Annualized.
(c) 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.
Page 20 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2016 (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 ("SEC") under the Investment Company Act of 1940, as amended (the
"1940 Act"). The Fund trades under the ticker symbol FEO on the New York Stock
Exchange ("NYSE").
The Fund's investment objective is to seek a high level of total return. The
Fund pursues its objective by investing at least 80% of its Managed Assets in a
diversified portfolio of equity and fixed-income securities of issuers in
emerging market countries. "Managed Assets" means the total asset value of the
Fund minus the sum of the Fund's liabilities other than the principal amount of
borrowings, if any. There can be no assurance that the Fund will achieve its
investment objective.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund, which is an investment company within the scope of Financial
Accounting Standards Board ("FASB") Accounting Standards Update 2013-08, follows
accounting and reporting guidance under FASB Accounting Standards Codification
Topic 946, "Financial Services-Investment Companies." The following is a summary
of significant accounting policies consistently followed by the Fund in the
preparation of its financial statements. The preparation of financial statements
in accordance with accounting principles generally accepted in the United States
of America ("U.S. GAAP") requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The net asset value ("NAV") of the Common Shares of the Fund is determined
daily, as of the close of regular trading on the NYSE, normally 4:00 p.m.
Eastern time, on each day the NYSE is open for trading. If the NYSE closes early
on a valuation day, the NAV is determined as of that time. Domestic debt
securities and foreign securities are priced using data reflecting the earlier
closing of the principal markets for those securities. The Fund's NAV per Common
Share is calculated by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses, dividends declared but unpaid and any borrowings of the Fund), by the
total number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Fund's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Fund's Board of Trustees,
and in accordance with provisions of the 1940 Act. Investments valued by the
Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to
the Portfolio of Investments. The Fund's investments are valued as follows:
Corporate bonds, corporate notes and other debt securities are valued on
the basis of valuations provided by dealers who make markets in such
securities or by 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 21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2016 (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 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 pricing service is unable to
provide a market price; securities whose trading has been formally suspended; a
security whose market or fair value price is not available from a
pre-established pricing source; a security with respect to which an event has
occurred that is likely to materially affect the value of the security after the
market has closed but before the calculation of the Fund's NAV or make it
difficult or impossible to obtain a reliable market quotation; and a security
whose price, as provided by the pricing service, does not reflect the security's
fair value. As a general principle, the current fair value of a security would
appear to be the amount which the owner might reasonably expect to receive for
the security upon its current sale. When fair value prices are used, generally
they will differ from market quotations or official closing prices on the
applicable exchanges. A variety of factors may be considered in determining the
fair value of such securities, including, but not limited to, the following:
1) the fundamental business data relating to the issuer, or
economic data relating to the country of issue;
2) an evaluation of the forces which influence the market in
which these securities are purchased and sold;
3) the type, size and cost of security;
4) the financial statements of the issuer, or the financial
condition of the country of issue;
5) the credit quality and cash flow of the issuer, or country of
issue, based on the Sub-Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities
(or equity securities) of the issuer/borrower, or comparable
companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any,
securing the security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the issuer's management (for corporate debt
only);
11) the economic, political and social prospects/developments of
the country of issue and the assessment of the country's
governmental leaders/officials (for sovereign debt only);
12) the prospects for the issuer's industry, and multiples (of
earnings and/or cash flows) being paid for similar businesses
in that industry (for corporate debt only); and
13) other relevant factors.
Fair valuation of an equity security will be based on the consideration of all
available information, including, but not limited to the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or
the appropriate stock exchange;
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 22
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2016 (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, 2016, 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, 2016, the Fund had no when-issued, delayed-delivery or forward
purchase commitments.
C. FORWARD FOREIGN CURRENCY CONTRACTS
The Fund is subject to foreign currency risk in the normal course of pursuing
its investment objective. Forward foreign currency contracts are agreements
between two parties ("Counterparties") to exchange one currency for another at a
future date and at a specified price. The Fund uses forward foreign currency
contracts to facilitate transactions in foreign securities and to manage the
Fund's foreign currency exposure. These contracts are valued daily, and the
Fund's net equity therein, representing unrealized gain or loss on the contracts
as measured by the difference between the forward foreign exchange rates at the
dates of entry into the contracts and the forward rates at the reporting date,
is included in "Unrealized appreciation/(depreciation) on forward foreign
currency contracts" on the Statement of Assets and Liabilities. The change in
unrealized appreciation/(depreciation) is included in "Net change in unrealized
appreciation(depreciation) on forward foreign currency contracts" on the
Statement of Operations. When the forward contract is closed, the Fund records a
realized gain or loss equal to the difference between the proceeds from (or the
cost of) the closing transaction and the Fund's basis in the contract. This
Page 23
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2016 (UNAUDITED)
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 purchase 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, 2016, 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 of Gross Amounts Assets Presented ------------------------
Recognized Offset in the in the Statement Collateral
Amounts Statement of Assets of Assets and Financial Amounts
Assets and Liabilities Liabilities Instruments Received Net Amount
------------------------------------------------------------------------------------------------------------------------------
Forward Foreign
Currency Contracts* $ 114,136 $ -- $ 114,136 $ (26,747) $ -- $ 87,389
Gross Amounts
not Offset in the
Net Amounts of Statement of
Liabilities Assets and Liabilities
Gross amounts of Gross Amounts Presented in the ------------------------
Recognized Offset in the Statement of Collateral
Amounts Statement of Assets Assets and Financial Amounts
Liabilities and Liabilities Liabilities Instruments Pledged Net Amount
------------------------------------------------------------------------------------------------------------------------------
Forward Foreign
Currency Contracts* $ (26,747) $ -- $ (26,747) $ 26,747 $ -- $ --
* The respective counterparties for each contract are disclosed in the
Forward Foreign Currency Contracts table in the Portfolio of Investments.
E. FOREIGN CURRENCY
The books and records of the Fund are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investments and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statement of Operations. Unrealized gains and losses on
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statement of Operations. Net realized foreign currency gains and losses
include the effect of changes in exchange rates between trade date and
settlement date on investment security transactions, foreign currency
transactions and interest and dividends received and are shown in "Net realized
Page 24
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2016 (UNAUDITED)
gain (loss) on foreign currency transactions" on the Statement of Operations.
The portion of foreign currency gains and losses related to fluctuation in
exchange rates between the initial purchase settlement date and subsequent sale
trade date is included in "Net realized gain (loss) on foreign currency
transactions" on the Statement of Operations.
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, 2016, the Fund held restricted securities
as shown in the following table that Aberdeen Asset Management Inc. ("Aberdeen"
or the "Sub-Advisor") has deemed illiquid pursuant to procedures adopted by the
Fund's Board of Trustees. Although market instability can result in periods of
increased overall market illiquidity, liquidity for each security is determined
based on security-specific factors and assumptions, which require subjective
judgment. The Fund does not have the right to demand that such securities be
registered. These securities are valued according to the valuation procedures as
stated in the Portfolio Valuation 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 $ 1.65 $ 350,000 $ 5,775 0.01%
OAS Investments GmbH, 8.25%, 10/19/19 10/15/2012 200,000 0.51 200,000 1,020 0.00*
---------------------------------------
$ 550,000 $ 6,795 0.01%
=======================================
* Amount is less than 0.01%.
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 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, 2015 was as follows:
Distributions paid from:
Ordinary income................................. $ --
Capital gain.................................... --
Return of capital............................... 7,445,649
As of December 31, 2015, the distributable earnings and net assets on a tax
basis were as follows:
Undistributed ordinary income................... $ --
Undistributed capital gains..................... --
-------------
Total undistributed earnings.................... --
Accumulated capital and other losses............ (29,495)
Net unrealized appreciation (depreciation)...... (3,635,946)
-------------
Total accumulated earnings (losses)............. (3,665,441)
Other........................................... (25,406)
Paid-in capital................................. 84,835,710
-------------
Net assets...................................... $ 81,144,863
=============
Page 25
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2016 (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 and state income taxes.
However, due to the timing and amount of distributions, the Fund may be subject
to an excise tax of 4% of the amount by which approximately 98% of the Fund's
taxable income exceeds the distributions from such taxable income for the
calendar year.
Certain countries assess a capital gains tax on securities sold in their local
markets. This tax is accrued as the securities in these foreign markets
appreciate in value and is paid at the time of sale to the extent a capital gain
is realized. Taxes accrued on securities in an unrealized appreciation position
are included in "Net change in unrealized appreciation (depreciation)" on the
Statement of Operations. The capital gains tax paid on securities sold is
included in "Foreign capital gains tax" on the Statement of Operations.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At December 31, 2015, the
Fund had no non-expiring capital loss carryforwards for federal income tax
purposes.
Certain losses realized during the current fiscal year may be deferred and
treated as occurring on the first day of the following fiscal year for federal
income tax purposes. For the fiscal year ended December 31, 2015, the Fund
incurred and elected to defer capital losses of $29,495.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ended 2012, 2013,
2014 and 2015 remain open to federal and state audit. As of June 30, 2016,
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.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
services, First Trust is entitled to a monthly fee calculated at an annual rate
of 1.00% of the Fund's Managed Assets. First Trust also provides fund reporting
services to the Fund for a flat annual fee in the amount of $9,250.
Aberdeen Asset Management Inc. ("Aberdeen" or the "Sub-Advisor") serves as the
Fund's sub-advisor and manages the Fund's portfolio subject to First Trust's
supervision. The Sub-Advisor receives a monthly portfolio management fee
calculated at an annual rate of 0.50% of the Fund's Managed Assets that is paid
by First Trust out of its investment advisory fee.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
Administrator, Fund Accountant and Transfer Agent in accordance with certain fee
arrangements. As administrator and fund accountant, BNYM IS is responsible for
providing certain administrative and accounting services to the Fund, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records. As transfer agent, BNYM IS is
responsible for maintaining shareholder records for the Fund. The Bank of New
York Mellon ("BNYM") serves as the Fund's Custodian in accordance with certain
fee arrangements. As custodian, BNYM is responsible for custody of the Fund's
assets. BNYM IS and BNY 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.
Page 26
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2016 (UNAUDITED)
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investments, excluding short-term
investments, for six months ended June 30, 2016, were $29,216,387 and
$31,129,678, respectively.
5. DERIVATIVES TRANSACTIONS
The following table presents the type of derivative held by the Fund at June 30,
2016, 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 $ 114,136 currency contracts $ (26,747)
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, 2016, 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 $ (110,401)
Net change in unrealized appreciation (depreciation) on forward
foreign currency contracts $ 52,621
During the six months ended June 30, 2016, notional values of forward foreign
currency contracts opened and closed were $37,977,939 and $30,255,890,
respectively.
6. BORROWINGS
The Fund has 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). The total commitment under the facility is up to $15,000,000. The
borrowing rate under the revolving credit facility is equal to the 1-month LIBOR
plus 75 basis points. As of June 30, 2016, the Fund had one loan outstanding
under the revolving credit facility totaling $5,800,000. For six months ended
June 30, 2016, the average amount outstanding was $5,800,000. The high and low
annual interest rates during the six months ended June 30, 2016 were 1.21% and
1.07%, respectively, and the weighted average interest rate was 1.17%. The
interest rate at June 30, 2016 was 1.21%. 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.
The revolving credit facility is scheduled to expire on November 4, 2016, but it
can be renewed annually.
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 to the Fund through
the date the financial statements were issued, and has determined that there
were no subsequent events requiring recognition or disclosure in the financial
statements that have not already been disclosed.
Page 27
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2016 (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.
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Form N-Q's
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
Page 28
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2016 (UNAUDITED)
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy
Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust High Income Long/Short Fund, First Trust Energy Infrastructure
Fund, First Trust MLP and Energy Income Fund, First Trust Intermediate Duration
Preferred & Income Fund and First Trust New Opportunities MLP & Energy Fund was
held on April 22, 2016 (the "Annual Meeting"). At the Annual Meeting, James A.
Bowen and Niel B. Nielson were elected by the Common Shareholders of the First
Trust/Aberdeen Emerging Opportunity Fund as the Class III Trustees for a
three-year term expiring at the Fund's annual meeting of shareholders in 2019.
The number of votes cast in favor of Mr. Bowen was 3,297,630, the number of
votes withheld was 1,106,607 and the number of broker non-votes was 865,840. The
number of votes cast in favor of Mr. Nielson was 3,294,990, the number of votes
withheld was 1,109,247 and the number of broker non-votes was 865,840. Richard
E. Erickson, Thomas R. Kadlec and Robert F. Keith 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, 2017 at a meeting held on June 13, 2016. 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 22, 2016 and June 13, 2016, 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 (including the relevant personnel
responsible for these services and their experience); the advisory and
sub-advisory fee rates payable by the Fund as compared to fees charged to other
clients of the Advisor and the Sub-Advisor and as compared to fees charged to a
peer group of funds compiled by Management Practice, Inc. ("MPI"), an
independent source (the "MPI Peer Group"); 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 a special meeting held on
April 22, 2016, 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 13, 2016 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. 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 policies. In addition, as
part of the Board's consideration of the Advisor's services, the Advisor, in its
written materials and at the April 22, 2016 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, in addition to the written materials provided by the Sub-Advisor, at
the June 13, 2016 meeting, the Board also received a presentation from
representatives of the Sub-Advisor, including one of the portfolio managers, one
Page 29
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2016 (UNAUDITED)
of the portfolio managers, discussing the services that the Sub-Advisor provides
to the Fund and how the Sub-Advisor manages 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. 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
the 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; and (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 or 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 net
assets, was above 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, 2015 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- and
five-year periods and underperformed the MPI Peer Group average for the
three-year period ended December 31, 2015. The Board also noted that the Fund
underperformed its blended benchmark in the one- and three-year periods, but
outperformed in the five-year 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, 2015 and the Fund's average trading discount during 2015
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, 2015 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
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 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 considered that the sub advisory fee rate was negotiated at
arm's length between the Advisor and the Sub-Advisor, an unaffiliated third
party. The Board also considered data provided by the Sub-Advisor as to the
profitability of the Sub Advisory Agreement to the Sub-Advisor. The Board noted
the inherent limitations in the profitability analysis and concluded that the
profitability analysis for the Advisor was more relevant, although the estimated
profitability of the Sub Advisory Agreement appeared to be not unreasonable in
Page 30
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2016 (UNAUDITED)
light of the services provided to the Fund. 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.
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.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund, which include a global bond and equity
portfolio of investment grade and below-investment grade government and
corporate debt securities. The value of these securities, like other market
investments, may move up or down, sometimes rapidly and unpredictably. Common
Shares at any point in time may be worth less than the original investment, even
after taking into account the reinvestment of Fund dividends and distributions.
Security prices can fluctuate for several reasons including the general
condition of the bond market, or when political or economic events affecting the
issuers occur. When the Advisor or Sub-Advisor determines that it is temporarily
unable to follow the Fund's investment strategy or that it is impractical to do
so (such as when a market disruption event has occurred and trading in the
securities is extremely limited or absent), the Fund may take temporary
defensive positions.
NON-INVESTMENT GRADE SECURITIES RISK: The Fund may invest up to 80% of its
Managed Assets in non-investment grade securities. Non-investment grade
securities are rated below "Baa3" by Moody's Investors Service, Inc., below
"BBB-" by Standard & Poor's, or comparably rated by another nationally
recognized statistical rating organization or, if unrated, determined by the
Sub-Advisor to be of comparable credit quality. Non-investment grade debt
instruments are commonly referred to as "high-yield" or "junk" bonds and are
considered speculative with respect to the issuer's capacity to pay interest and
repay principal and are susceptible to default or decline in market value due to
adverse economic and business developments. The market values for high-yield
securities tend to be very volatile, and these securities are less liquid than
investment grade debt securities.
EMERGING MARKETS RISK: Under normal market conditions, the Fund will invest at
least 80% of its Managed Assets in equity or fixed-income securities of issuers
located in countries considered to be emerging markets. Investments in such
securities are considered speculative. In addition to the general risks of
investing in non-U.S. securities, heightened risks of investing in emerging
markets securities include: smaller market capitalization of securities markets,
which may suffer periods of relative illiquidity; significant price volatility;
restrictions on foreign investment; and possible restrictions on repatriation of
investment income and capital. Furthermore, foreign investors may be required to
register the proceeds of sales, and future economic or political crises could
lead to price controls, forced mergers, expropriation or confiscatory taxation,
seizure, nationalization or creation of government monopolies. The currencies of
emerging market countries may experience significant declines against the U.S.
dollar, and devaluation may occur subsequent to investments in these currencies
by the Fund. Inflation and rapid fluctuations in inflation rates have had, and
may continue to have, negative effects on the economies and securities markets
of certain emerging market countries.
FIXED-INCOME SECURITIES RISK: Debt securities, including high-yield securities,
are subject to certain risks, including: (i) issuer risk, which is the risk that
the value of fixed-income securities may decline for a number of reasons which
directly relate to the issuer, such as management performance, financial
leverage and reduced demand for the issuer's goods and services or; (ii)
reinvestment risk, which is the risk that income from the Fund's portfolio will
decline if the Fund invests the proceeds from matured, traded or called bonds at
market interest rates that are below the Fund portfolio's current earnings rate;
(iii) prepayment risk, which is the risk that during periods of declining
interest rates, the issuer of a security may exercise its option to prepay
principal earlier than scheduled, forcing the reinvestment in lower yielding
securities; and (iv) credit risk, which is the risk that a security in the
Fund's portfolio will decline in price or the issuer fails to make interest
payments when due because the issuer of the security experiences a decline in
its financial status.
INTEREST RATE RISK: The Fund's portfolio is also subject to interest rate risk.
Interest rate risk is the risk that fixed-income securities will decline in
value because of changes in market interest rates. Investments in debt
securities with long-term maturities may experience significant price declines
if long-term interest rates increase.
NON-U.S. ISSUER RISK: Investments in the securities and instruments of non-U.S.
issuers involve certain considerations and risks not ordinarily associated with
investments in securities and instruments of U.S. issuers. Non-U.S. companies
are not generally subject to uniform accounting, auditing and financial
standards and requirements comparable to those applicable to U.S. companies.
Page 31
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2016 (UNAUDITED)
Non-U.S. securities exchanges, brokers and listed companies may be subject to
less government supervision and regulation than exists in the United States.
Dividend and interest income may be subject to withholding and other non-U.S.
taxes, which may adversely affect the net return on such investments. There may
be difficulty in obtaining or enforcing a court judgment abroad.
CURRENCY RISK: The value of securities denominated or quoted in foreign
currencies may be adversely affected by fluctuations in the relative currency
exchange rates and by exchange control regulations. The Fund's investment
performance may be negatively affected by a devaluation of a currency in which
the Fund's investments are denominated or quoted. Further, the Fund's investment
performance may be significantly affected, either positively or negatively, by
currency exchange rates because the U.S. dollar value of securities denominated
or quoted in another currency will increase or decrease in response to changes
in the value of such currency in relation to the U.S. dollar. While certain of
the Fund's non-U.S. dollar-denominated securities may be hedged into U.S.
dollars, hedging may not alleviate all currency risks.
LEVERAGE RISK: The use of leverage results in additional risks and can magnify
the effect of any losses. The funds borrowed pursuant to a leverage borrowing
program constitute a substantial lien and burden by reason of their prior claim
against the income of the Fund and against the net assets of the Fund in
liquidation. The rights of lenders to receive payments of interest on and
repayments of principal on any borrowings made by the Fund under a leverage
borrowing program are senior to the rights of holders of Common Shares with
respect to payment of dividends or upon liquidation. If the Fund is not in
compliance with certain credit facility provisions, the Fund may not be
permitted to declare dividends or other distributions, including dividends and
distributions with respect to Common Shares or purchase Common Shares.
GOVERNMENT SECURITIES RISK: The ability of a government issuer, especially in an
emerging market country, to make timely and complete payments on its debt
obligations will be strongly influenced by the government issuer's balance of
payments, including export performance, its access to international credits and
investments, fluctuations of interest rates and the extent of its foreign
reserves. A country whose exports are concentrated in a few commodities or whose
economy depends on certain strategic imports could be vulnerable to fluctuations
in international prices of these commodities or imports. To the extent that a
country receives payment for its exports in currencies other than U.S. dollars,
its ability to make debt payments denominated in U.S. dollars could be adversely
affected. If a government issuer cannot generate sufficient earnings from
foreign trade to service its external debt, it may need to depend on continuing
loans and aid from foreign governments, commercial banks, and multinational
organizations. There are no bankruptcy proceedings similar to those in the
United States by which defaulted government debt may be collected. Additional
factors that may influence a government issuer's ability or willingness to
service debt include, but are not limited to, a country's cash flow situation,
the availability of sufficient foreign exchange on the date a payment is due,
the relative size of its debt service burden to the economy as a whole, and the
issuer's policy towards the International Monetary Fund, the International Bank
for Reconstruction and Development and other international agencies to which a
government debtor may be subject.
NON-U.S. GOVERNMENT SECURITIES RISK: Economies and social and political climates
in individual countries may differ unfavorably from the United States. Non-U.S.
economies may have less favorable rates of growth of gross domestic product,
rates of inflation, currency valuation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Many countries have
experienced extremely high rates of inflation for many years. Unanticipated
economic, political and social developments may also affect the values of the
Fund's investments and limit the availability of additional investments in such
countries. Furthermore, such developments may significantly disrupt the
financial markets or interfere with the Fund's ability to enforce its rights
against non-U.S. government issuers.
Investments in debt instruments of issuers located in emerging market countries
are considered speculative. Heightened risks of investing in emerging markets
government debt include: smaller market capitalization of securities markets,
which may suffer periods of relative illiquidity; significant price volatility;
restrictions on foreign investment; and possible repatriation of investment
income and capital. Furthermore, foreign investors may be required to register
the proceeds of sales and future economic or political crises could lead to
price controls, forced mergers, expropriation or confiscatory taxation, seizure,
nationalization or creation of government monopolies. The currencies of emerging
market countries may experience significant declines against the U.S. dollar,
and devaluation may occur subsequent to investments in these currencies by the
Fund. Inflation and rapid fluctuations in inflation rates have had, and may
continue to have, negative effects on the economies and securities markets of
certain emerging market countries.
Page 32
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Aberdeen Asset Management Inc.
1735 Market Street, 32nd Floor
Philadelphia, PA 19103
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
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
(01/01/2016 -
01/31/2016) 19,262 $12.405 57,708 208,681
Month #2
(02/01/2016 - 10,588 $12.385 68,296 198,093
02/29/2016)
Month #3
(03/01/2016 - 1,377 $13.749 69,673 196,716
03/31/2016)
Month #4
(04/01/2016 - 3,843 $14.017 73,516 192,873
04/30/2016)
Month #5
(05/01/2016 - 2,700 $13.992 76,216 190,173
05/31/2016)
Month #6
(06/01/2016 - 0 0 76,216 190,173
06/30/2016)
Total 37,770 $12.726 76,216 190,173
On September 15, 2015, the Fund commenced a Share Repurchase Program. The
program originally expired on March 15, 2016, but on March 15, 2016, the Fund
announced that the Board of Trustees authorized the continuation of the Share
Repurchase Program. For the six months ended June 30, 2016, and the year ended
December 31, 2015, the Fund repurchased 37,770 and 38,446 of its shares,
respectively, at a weighted-average discount of 15.16% and 15.14%, respectively,
from net asset value per share. The Fund expects to repurchase its outstanding
shares until the earlier of (i) the repurchase of an additional 190,173 common
shares (for an aggregate of 266,389), or (ii) September 15, 2016.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR
270.30a-3(c))) are effective, as of a date within 90 days of the filing
date of the report that includes the disclosure required by this
paragraph, based on their evaluation of these controls and procedures
required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and
Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as
amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the registrant's second fiscal quarter
of the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) 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 22, 2016
------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: August 22, 2016
------------------
By (Signature and Title)* /s/ Donald P. Swade
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: August 22, 2016
------------------
* Print the name and title of each signing officer under his or her signature.