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 811-22080
-------------
First Trust Active Dividend Income Fund
--------------------------------------------------------------
(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
--------------------------------------------------------------
(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
1120 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: November 30
-------------
Date of reporting period: May 31, 2010
-------------------
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
[LOGO OMITTED] FIRST TRUST
[GRAPHIC OMITTED]
SEMI-ANNUAL
REPORT
For the Six Months Ended
May 31, 2010
FIRST TRUST
ACTIVE DIVIDEND
INCOME FUND
[LOGO OMITTED] AVIANCE
CAPITAL MANAGEMENT
Front Cover
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
FIRST TRUST ACTIVE DIVIDEND INCOME FUND (FAV)
SEMI-ANNUAL REPORT
MAY 31, 2010
Shareholder Letter 1
At A Glance 2
Portfolio Commentary 3
Portfolio of Investments 8
Statement of Assets and Liabilities 12
Statement of Operations 13
Statements of Changes in Net Assets 14
Financial Highlights 15
Notes to Financial Statements 16
Additional Information 20
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 Aviance Capital Management, LLC ("Aviance" 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 Active Dividend Income 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 objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Notes to
Financial Statements for a discussion of other risks of investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Aviance are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in the prospectus, the statement of additional information, this
report and other regulatory filings.
- --------------------------------------------------------------------------------
SHAREHOLDER LETTER
- --------------------------------------------------------------------------------
FIRST TRUST ACTIVE DIVIDEND INCOME FUND (FAV)
SEMI-ANNUAL REPORT
MAY 31, 2010
Dear Shareholders:
I am pleased to present you with the semi-annual report for your investment in
First Trust Active Dividend Income Fund (the "Fund").
First Trust Advisors L.P. ("First Trust") has always believed that staying
invested in quality products and having a long-term horizon can help investors
reach their financial goals. The past eighteen months have been challenging, but
successful investors understand that the success they have achieved is typically
because of their long-term investment perspective through all kinds of markets.
The report you hold contains detailed information about your investment; a
portfolio commentary from the Fund's management team that provides a recap of
the period; a performance analysis and a market and Fund outlook. Additionally,
you will find the Fund's financial statements for the six months this report
covers. I encourage you to read this document and discuss it with your financial
advisor.
First Trust offers a variety of products that can fit many financial plans to
help those investors who are seeking long-term financial success. You may want
to talk to your advisor about the other investments we offer that might fit your
financial plan.
At First Trust we continue to be committed to making available up-to-date
information about your investments so you and your financial advisor have
current information on your portfolio. We value our relationship with you, and
we thank you for the opportunity to assist you in achieving your financial
goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
President of First Trust Active Dividend Income Fund
Page 1
FIRST TRUST ACTIVE DIVIDEND INCOME FUND
"AT A GLANCE"
AS OF MAY 31, 2010 (UNAUDITED)
- -------------------------------------------------------------------------
Fund Statistics
- -------------------------------------------------------------------------
Symbol on New York Stock Exchange FAV
Common Share Price $10.23
Common Share Net Asset Value ("NAV") $9.66
Premium (Discount) to NAV 5.90%
Net Assets Applicable to Common Shares $74,920,629
Current Quarterly Distribution per Common Share (1) $0.3200
Current Annualized Distribution per Common Share $1.2800
Current Distribution Rate on Closing Common Share Price (2) 12.51%
Current Distribution Rate on NAV (2) 13.25%
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
Common Share Price & NAV (weekly closing price)
- -------------------------------------------------------------------------
[CHART OMITTED]
[DATA POINTS REPRESENTED IN CHART]
Common Share Price NAV
5/31/2009 9.99 9.86
6/5/2009 10.20 10.06
6/12/2009 11.65 10.15
6/19/2009 9.92 9.79
6/26/2009 10.70 9.78
7/2/2009 11.12 9.59
7/10/2009 10.81 9.36
7/17/2009 11.89 10.02
7/24/2009 10.71 9.96
7/31/2009 11.29 10.01
8/7/2009 11.63 10.18
8/14/2009 11.55 10.05
8/21/2009 10.62 10.23
8/28/2009 11.56 10.26
9/4/2009 10.81 10.16
9/11/2009 11.64 10.43
9/18/2009 11.45 10.68
9/25/2009 12.35 10.50
10/2/2009 12.11 10.29
10/9/2009 12.91 10.82
10/16/2009 13.98 10.93
10/23/2009 12.63 10.41
10/30/2009 10.94 9.96
11/6/2009 12.38 10.24
11/13/2009 11.90 10.55
11/20/2009 11.79 10.45
11/27/2009 12.10 10.46
12/4/2009 12.07 10.57
12/11/2009 12.27 10.63
12/18/2009 12.42 10.67
12/24/2009 12.70 10.94
12/31/2009 12.62 10.85
1/8/2010 13.23 11.10
1/15/2010 13.39 10.99
1/22/2010 12.19 10.12
1/29/2010 12.40 9.84
2/5/2010 11.47 9.81
2/12/2010 12.31 10.02
2/19/2010 12.27 10.40
2/26/2010 12.58 10.31
3/5/2010 13.35 10.66
3/12/2010 13.44 10.71
3/19/2010 13.68 10.67
3/26/2010 13.58 10.72
4/1/2010 14.16 10.89
4/9/2010 14.57 11.04
4/16/2010 13.30 11.03
4/23/2010 12.27 10.90
4/30/2010 11.98 10.58
5/7/2010 11.73 9.78
5/14/2010 11.30 10.05
5/21/2010 9.75 9.56
5/31/2010 10.23 9.66
- --------------------------------------------------------------------------------
Performance
- --------------------------------------------------------------------------------
Average Annual
Total Return
6 Months Ended One Year Ended Inception (9/20/2007)
5/31/2010 5/31/2010 to 5/31/2010
FUND PERFORMANCE (3)
NAV -1.63% 13.98% -9.70%
Market Value -9.68% 19.13% -9.32%
INDEX PERFORMANCE
Russell 1000 Value Index 2.32% 22.32% -9.09%
S&P 500 Index 0.41% 20.99% -9.58%
- --------------------------------------------------------------------------------
- ------------------------------------------------------------
% of Total
Top 10 Holdings Investments
- ------------------------------------------------------------
Intel Corp. 2.9%
Broadcom Corp., Class A 2.8
Canadian Imperial Bank of Commerce 2.8
General Electric Co. 2.7
Kinder Morgan Energy Partners, L.P. 2.6
Annaly Capital Management, Inc. 2.5
Johnson Controls, Inc. 2.5
Merck & Co., Inc. 2.3
PepsiCo, Inc. 2.1
Reynolds American, Inc. 2.1
- ------------------------------------------------------------
Total 25.3%
=============
- ------------------------------------------------------------
% of Total
Sector Allocation Investments
- ------------------------------------------------------------
Financials 23.4%
Energy 17.7
Information Technology 15.1
Industrials 13.1
Consumer Discretionary 12.0
Consumer Staples 7.8
Telecommunication Services 3.1
Utilities 3.1
Materials 2.4
Health Care 2.3
- ------------------------------------------------------------
Total 100.0%
=============
(1) Most recent distribution paid or declared through 5/31/2010. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 5/31/2010. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by the
Dividend Reinvestment Plan and changes in NAV per share for net asset value
returns and changes in Common Share price for market value returns. Total
returns do not reflect sales load and are not annualized for periods less
than one year. Past performance is not indicative of future results.
Page 2
- --------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (Unaudited)
- --------------------------------------------------------------------------------
FIRST TRUST ACTIVE DIVIDEND INCOME FUND (FAV)
SEMI-ANNUAL REPORT
SUB-ADVISOR
Aviance Capital Management, LLC, ("Aviance") a registered investment advisor, is
the Sub-Advisor to the First Trust Active Dividend Income Fund. Aviance is an
asset management firm focused on managing multi-cap value and growth portfolios
and is currently managed by Christian C. Bertelsen, Michael J. Dixon, and Edward
C. Bertelsen, who are all Founding Members of the firm. Aviance is responsible
for the day-to-day management of the Fund's portfolio utilizing a team made up
of Christian C. Bertelsen, James R. Neel, Edward C. Bertelsen and Mark Belanian.
The team has approximately six years of experience working together and
approximately 80 years of cumulative industry experience.
PORTFOLIO MANAGEMENT TEAM
CHRISTIAN C. BERTELSEN, Chief Investment Officer and Senior Portfolio Manager
Christian C. Bertelsen has over 41 years of investment experience. In November
2004, he became Chief Investment Officer at Global Financial Private Capital
("GFPC"), the incubator company of Aviance. From July 1997 to December 2003, Mr.
Bertelsen was director of the value equity group for Phoenix Investment Counsel,
during which time he was responsible for developing strategies that focused on
the analysis of dividends as a means of identifying undervalued companies and
generating income. He served as Chief Investment Officer at Dreman Value
Advisors between January 1996 and July 1997, and was a Senior Vice President
with Eagle Asset Management between April 1993 and January 1996. From June 1986
to April 1993, Mr. Bertelsen headed the equity investment department at Colonial
Advisory Services, Inc., and managed the Colonial Fund. Prior to 1986, he held
positions with Batterymarch Financial Management and State Street Bank & Trust
Company. Mr. Bertelsen holds an M.B.A. and a B.A. in Economics and History from
Boston University.
JAMES R. NEEL, CFA, Portfolio Manager
James R. Neel, CFA, has over 30 years of experience in investment management.
While managing equity mutual funds for Kemper in the 1990s, Mr. Neel won a
Lipper Award in the Growth and Income category. Mr. Neel also served as the
portfolio strategist for Kemper Financial Services; CEO of Dreman Value
Advisors, where he worked with Christian Bertelsen; and Partner at Loomis
Sayles. Mr. Neel is a graduate of Michigan State University, where he received a
B.A. in 1965. He received an M.B.A. from Michigan State University in 1966. Mr.
Neel earned the Chartered Financial Analyst designation in 1976 and also served
four years as a U.S. Navy officer.
EDWARD C. BERTELSEN, Portfolio Manager - Research
Edward C. Bertelsen has over 14 years of experience in supporting and managing
portfolios. He is also responsible for a limited number of selected client
relationships. He joined GFPC/Aviance in April 2004 and was instrumental in
creating its trading environment. Between March 2001 and April 2004, Mr.
Bertelsen was a Senior Portfolio Manager with Salomon Smith Barney. Between
November 1996 and March 2001, Mr. Bertelsen was employed by Legg Mason Wood
Walker as a Portfolio Manager. He graduated with Honors from Albion College in
1993 with a B.A. in Economics and History and started his financial career with
Raymond James in July 1993.
MARK BELANIAN, Portfolio Analyst
Mark Belanian has over 10 years of investment industry experience. Mr. Belanian
joined GFPC/Aviance in February 2006 from Merrill Lynch's Global Private Client
Group in Sarasota, Florida, where he had worked since February 2005. Mr.
Belanian worked as a portfolio analyst at Phoenix Investment Counsel between
June 1998 and January 2005, and worked with Christian Bertelsen during Mr.
Bertelsen's time at Phoenix Investment Counsel. Mr. Belanian graduated from
Trinity College with a B.A. in Modern Language.
FIRST TRUST ACTIVE DIVIDEND INCOME FUND
The primary investment objective of the First Trust Active Dividend Income Fund
("FAV" or the "Fund") is to seek a high level of current income. Its secondary
objective is capital appreciation. The Fund pursues its investment objectives by
investing at least 80% of its managed assets in a diversified portfolio of
dividend-paying multi-cap equity securities of both U.S. and non-U.S. issuers
that the Fund's Sub-Advisor believes offer the potential for attractive income
and/or capital appreciation. There can be no assurance that the Fund's
investment objectives will be achieved. The Fund may not be appropriate for all
investors.
Page 3
- -------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (Unaudited) (Continued)
- -------------------------------------------------------------------------------
MARKET RECAP
This section discusses the primary factors which impacted FAV's two integrated
objectives throughout the six months ended May 31, 2010.
THE "V" SHAPED RECOVERY BECOMES A SQUARED ROOT [GRAPHIC OMITTED]
In the Fund's last Annual Report, we noted the potential for a "Square Root"
shaped recovery for U.S. equity markets from the lows of early March 2009. As
suggested, the start of the six-month reporting period marked the end of the
"V-shaped" recovery and equity charts looked more like the flat portion of the
"Square Root" recovery.
The Russell 1000 Value Index ("Russell"), the Fund's primary benchmark, rose
2.32% between November 30, 2009 and May 31, 2010. The S&P 500 Index ("S&P 500"),
one of the Fund's secondary benchmarks, rose 0.41% for the same period. Holding
these benchmarks for the entire period was close to a break even proposition,
although both indices saw peak-to-trough swings of approximately 17%.
Two corrections - a mild one in January/February 2010 and a sharp one in May
2010 - were responsible for these lackluster equity returns. The intervening
periods saw healthy price appreciation based on healthy investor confidence.
The appearance of these two price drops, and the severity of the May correction,
didn't foretell a "double-dip" recession, as a portion of the popular media
predicted, but it did mark the end of the "easy" money made during the
"V-shaped" recovery. Confirmation that investor sentiment had shifted from
optimistic to pessimistic was provided by the return of spikes in the CBOE
Volatility Index (VIX), which measures S&P 500 options pricing as a proxy for
equity volatility.
Short, sharp corrections are historically a feature of strong bull markets. In
this case, they turned a period of double digit returns into a period of nominal
gains.
LEADERSHIP QUALITY CHANGES
Prior to the reporting period, companies with lower quality balance sheets and
smaller capitalizations led the equity market recovery from the bottom - these
are not the companies the Fund typically invests in.
November 2009 saw a change in the type of stocks that led the Russell benchmark
higher. Markets recognized that many of the larger companies that had weathered
the recession with quality fundamentals intact were looking undervalued. Since
FAV has continually maintained a high quality, dividend-centric emphasis, we
welcomed the re-enforcement of the Fund's strategy in November and December, as
after 6 long months, quality became an important focus for the markets. Names
previously considered "boring" and dividend rotation "sleeves" that appeared out
of fashion a few months ago began showing capital appreciation in addition to
their dividend income.
CORPORATE EARNINGS
A slow start to the earnings reporting season helped to create the
January/February "mini" correction. By the end of the reporting season, it was
clear that most U.S. companies had enjoyed another successful period. Not only
did most earnings reports beat estimates, but revenues were generally reported
ahead of expectations. Prior year earnings had been easy to beat as companies
cut expenses; a glance at unemployment numbers showed where a great deal of
corporate expenditure has been cut. But rising revenues during the reporting
period suggested that the economic recovery was translating into tangible sales.
EUROPEAN CREDIT CRISIS
Concerns regarding sovereign debt and deficits in the Euro Zone sparked the May
correction. Although this was essentially a credit issue, primarily affecting
the banking sector, markets worried about its effect on growth in developed
countries. It proved to be a stern reminder of our own domestic credit crisis of
2008 and stocks reacted accordingly.
As we ended the reporting period, U.S. equity indices were at, or below,
historical Price/Earnings ratios and approaching attractive valuations, in our
opinion, assuming growth continues at a reasonable pace. Many of the companies
that the Fund typically invests in had built strong balance sheets and cash
positions. These appeared to provide a floor to the price correction.
Page 4
- -------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (Unaudited) (Continued)
- -------------------------------------------------------------------------------
DIVIDEND RECAP
On April 5, 2010, Standard & Poor's announced that of approximately 7,000
publicly-owned companies that report dividend information to Standard & Poor's,
399 companies increased their dividend payment during the first quarter of 2010
against 48 companies that decreased their dividend.
In a press release issued by Standard & Poor's, Howard Silverblatt, Senior Index
Analyst at S&P Indices, said he believed that the first quarter represents a
rebirth of dividends in the U.S. domestic market. We believe this speaks to the
higher confidence that boards of directors are placing in both the economic
recovery and their companies' future earnings ability. The press release also
stated that dividends now have a higher coverage ratio from earnings than seen
last year at this time. And finally, the press release stated there was a 16%
increase in the number of issues covering their dividends, and a 31% decrease in
those still not covering their dividend payments. As a Fund which generates
income from the capture of dividend payments, this is positive news.
PERFORMANCE ANALYSIS
The net asset value ("NAV") total return1 of the Fund for the six months ended
May 31, 2010 was -1.63%. Over the same period, the total return of the Russell
was 2.32%, while our secondary benchmark indices, the S&P 500 and the Dow Jones
Select Dividend Index (DVY), returned 0.41% and 5.43%, respectively.
NAV PERFORMANCE
The Fund's NAV lagged the Russell by approximately 4%. This underperformance
occurred in the last few months of the period and was primarily the result of:
- The Fund's exposure to Emerging Equity Markets: During the last few
months of the reporting period, Emerging Markets significantly
underperformed U.S. equities. FAV has more exposure to Emerging
Markets than found within U.S. equity indices.
- The Fund's exposure to Energy: During the last few months of the
reporting period, the Oil & Gas components of FAV suffered capital
depreciation ahead of the benchmark. Traditionally, Oil & Gas
companies are strong dividend payers and we believe the downward
trend could reverse in the near future.
- The Fund's lack of exposure to Financials: FAV's managers are still
cautious with regard to the Financial sector. Dividend payouts are
still depressed and questions continue to exist regarding balance
sheet strength. The Russell benefitted from the outperformance of
the Financial sector in the last few months of the first calendar
quarter of 2010 to a much larger degree than FAV did.
PRICE PERFORMANCE
The Fund's market value provided a total return(1) of -9.68% during the
reporting period. This drop was likely largely due to the announcement in April
that FAV would cut its dividend distribution to reflect a balance between high
current income and NAV growth potential as market conditions allow. The change
in the dividend also provides additional flexibility for the Fund to take
advantage of the tax efficiency offered by its current capital loss
carry-forward amount, in that realized short-term gains, up to the capital loss
carry-forward amount, can be reinvested by the Fund instead of being distributed
as taxable ordinary income to Fund shareholders. The last few years have been
exceptionally volatile and up until April, FAV has maintained its dividend
through all the market distractions, even though, at times, this meant paying
income of approximately 20% plus on NAV.
Although the reduced dividend has likely lowered the average premium at which
the Fund's shares have traded over the past three months, the Fund's Sub-Advisor
feels this policy change will be beneficial to shareholders over the medium- to
long-term.
- -----------------
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 net asset
value returns and changes in common share price for market value returns.
Total returns do not reflect sales load. Past performance is not indicative
of future results.
Page 5
- -------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (Unaudited) (Continued)
- -------------------------------------------------------------------------------
MARKET & FUND OUTLOOK
We see economic and corporate fundamentals continuing to improve, although at a
reduced rate. For future quarters, significant earnings and revenue improvement
will become harder to maintain due to the improvements already reported in the
corresponding previous quarters. In our opinion, this is because for the last
two years, quarterly results have been easy to view as positive as the
corresponding prior year results were so bad (and guidance was generally
negative.) With a year or so of improving company results, it will be harder for
the market, we believe, to take a positive view on the coming reporting season.
Moreover, the market is now expecting continued improvement and is not as
impressed with "better than last year" results. Corporate performance levels are
now approaching levels prior to the recession and should, we believe, level off.
The effect this has on the equity indices, mentioned above as benchmarks for the
Fund, will to a large extent depend on how much the market has already assumed
corporate profits will continue to rise.
- - On an emotional level, the market may treat any slowdown in improvement as
a sign the recovery is over; the recovery had too much tied to prices and stock
prices need to fall accordingly.
- - On a numerical basis, current Price/Earnings ratios are low enough for us
to believe that most of the current earnings recovery is close to priced in to
equity markets. Assuming earnings continue to improve, albeit at a lower rate,
there is room for some price appreciation in many equity sectors as increases in
earnings push stock prices upwards in order to maintain Price/Earnings ratios.
Although equity prices tend to follow fundamentals over the long term, investor
sentiment drives markets in the short term. The "Great Debt & Derivative Unwind"
is not yet over; a fact the recent European Crisis brought back into clear
focus. There remains the distinct possibility of sudden and painful drops in
global equity prices if and when investor sentiment decides to prioritize bad
news, wherever it originates from.
One area of concern for the Fund's Sub-Advisor is the manner in which
machine-based, or programmed trading, has intensified the volatility of equity
markets. How does this affect the Fund? We believe it obscures medium- and
long-term trends from investor view by spotlighting "localized" events and
creating short-term counter-trends. At some stage, longer-term trends and
fundamentals should resume their importance in equity markets. This should
benefit those asset managers whose investment discipline is based on
fundamentals.
SO WHAT DO WE SEE AS THE FUNDAMENTAL EQUITY MARKET TREND FROM HERE?
We have positioned the Fund's portfolio to invest in those companies that
benefit from international revenues, primarily seeking domestic companies that
receive a portion (50% or more) of their revenues from overseas. This is based
on the belief that emerging market growth and balance sheet strength will be a
significant driver for global growth. In our opinion, developed nations have now
stabilized and can expect a reasonable level of growth; however, the exciting
opportunities lie in emerging markets, we believe.
Although this positioning underperformed during the reporting period for the
Fund as fiscal tightening in emerging markets and European austerity measures
made investors believe economic growth would slow markedly, these measures are
expected to be positive in the medium- to long-term and the Fund should benefit
accordingly.
Moreover, this theme fits well with the overall investment discipline of the
Fund: quality balance sheets and businesses. U.S. companies still lead the world
in productivity, financing, branding and management excellence. "Investing in
Emerging Markets by Investing in U.S. Companies" summarizes our current
investment theme.
INFLATION & INTEREST RATES
For 12 months or more, the demand for income-producing investments has
increased, driving bond and income-producing equity investment prices upwards.
At the same time, the U.S. Government has taken the opportunity to issue debt at
historically low interest rates.
At some stage in the future, interest rates should rise and the price of bonds
should fall accordingly. This will most likely be initiated by rising inflation
created by the amount of liquidity being pumped into the economy at low interest
rates. Even though price inflation is currently near zero (disinflation but not
deflation yet) and various deflationary features exist in the economy,
unemployment being a significant example, we are not currently planning for
significant deflation and the pressures this may bring.
Page 6
- -------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (Unaudited) (Continued)
- -------------------------------------------------------------------------------
Meaningful interest rate rises are probably more than one year away due to the
various economic factors which incentivize the government to keep interest rates
low and the fact that U.S. debt is still seen as the safest asset class.
When interest rates do rise, the Fund should benefit from the demand for income
switching from fixed-income to equity-based income as bond prices fall.
Additionally, rising interest rates are commonly a positive factor for the types
of companies in which FAV invests.
Page 7
FIRST TRUST ACTIVE DIVIDEND INCOME FUND
PORTFOLIO OF INVESTMENTS (A)
MAY 31, 2010 (UNAUDITED)
SHARES DESCRIPTION VALUE
-------- --------------------------------------------- ---------------
COMMON STOCKS - 91.5%
AEROSPACE & DEFENSE - 4.9%
10,000 Boeing (The) Co. $ 641,800
15,000 Honeywell International, Inc. 641,550
15,000 Lockheed Martin Corp. 1,198,800
15,000 Northrop Grumman Corp. 907,350
5,000 Raytheon Co. 262,050
______________
3,651,550
______________
AUTO COMPONENTS - 3.1%
10,000 Autoliv, Inc. 475,000
65,000 Johnson Controls, Inc. 1,854,450
______________
2,329,450
______________
AUTOMOBILES - 1.1%
70,000 Ford Motor Co. (b) 821,100
______________
BEVERAGES - 3.2%
1,000 Coca-Cola (The) Co. 51,400
20,000 Dr Pepper Snapple Group, Inc. 757,200
25,000 PepsiCo, Inc. 1,572,250
______________
2,380,850
______________
CAPITAL MARKETS - 1.2%
18,000 Northern Trust Corp. 914,580
______________
CHEMICALS - 0.5%
40,000 Huntsman Corp. 399,200
______________
COMMERCIAL BANKS - 6.6%
15,000 Bank of Montreal (The) 588,300
10,000 Canadian Imperial Bank of Commerce 2,031,300
30,000 PNC Financial Services Group, Inc. 941,250
20,000 Toronto-Dominion (The) Bank 1,369,400
______________
4,930,250
______________
COMMUNICATIONS EQUIPMENT - 1.6%
25,000 Harris Corp. 1,172,750
______________
COMPUTERS & PERIPHERALS - 4.2%
3,000 Apple, Inc. (b) 771,480
20,000 EMC Corp. (b) 372,400
70,000 NCR Corp. (b) 929,600
20,000 SanDisk Corp. (b) 932,400
10,000 Seagate Technology (b) 153,600
______________
3,159,480
______________
CONSTRUCTION & ENGINEERING - 0.3%
5,000 Fluor Corp. 234,600
______________
CONSUMER FINANCE - 0.6%
7,000 American Express Co. 279,090
5,000 Capital One Financial Corp. 206,500
______________
485,590
______________
DISTRIBUTORS - 1.6%
30,000 Genuine Parts Co. 1,218,300
______________
DIVERSIFIED FINANCIAL SERVICES - 3.8%
50,000 Bank of America Corp. 787,000
350,000 Citigroup, Inc. (b) 1,386,000
17,000 JPMorgan Chase & Co. 672,860
______________
2,845,860
______________
Page 8 See Notes to Financial Statements
FIRST TRUST ACTIVE DIVIDEND INCOME FUND
PORTFOLIO OF INVESTMENTS (A) - (CONTINUED)
MAY 31, 2010 (UNAUDITED)
SHARES DESCRIPTION VALUE
-------- --------------------------------------------- ---------------
COMMON STOCKS - (CONTINUED)
DIVERSIFIED TELECOMMUNICATION SERVICES - 2.3%
18,100 AT&T, Inc. $ 439,830
20,000 Iowa Telecommunications Services, Inc. 333,200
16,000 Verizon Communications, Inc. 440,320
45,000 Windstream Corp. 480,150
______________
1,693,500
______________
ELECTRIC UTILITIES - 2.4%
40,000 Pepco Holdings, Inc. 645,200
45,000 PPL Corp. 1,161,450
______________
1,806,650
______________
ELECTRICAL EQUIPMENT - 0.3%
5,000 Cooper Industries PLC 234,850
______________
ENERGY EQUIPMENT & SERVICES - 1.5%
20,000 Schlumberger Ltd. 1,123,000
______________
FOOD PRODUCTS - 0.7%
10,000 Kellogg Co. 534,300
______________
GAS UTILITIES - 0.7%
10,000 National Fuel Gas Co. 486,000
______________
HOTELS, RESTAURANTS & LEISURE - 3.0%
25,000 Carnival Corp. 905,750
20,000 McDonald's Corp. 1,337,400
______________
2,243,150
______________
HOUSEHOLD PRODUCTS - 1.3%
15,000 Clorox (The) Co. 942,300
______________
INDUSTRIAL CONGLOMERATES - 3.3%
120,000 General Electric Co. 1,962,000
15,000 Tyco International Ltd. 542,850
______________
2,504,850
______________
INSURANCE - 7.3%
10,000 Aflac, Inc. 443,000
15,000 Hartford Financial Services Group (The), Inc. 376,050
10,000 Lincoln National Corp. 264,600
33,000 Metlife, Inc. 1,336,170
25,000 Prudential Financial, Inc. 1,442,750
10,000 Alterra Capital Holdings Ltd. 187,100
80,000 XL Capital Ltd., Class A 1,408,800
______________
5,458,470
______________
MACHINERY - 3.2%
20,000 Cummins, Inc. 1,359,600
10,000 Illinois Tool Works, Inc. 464,300
10,000 Parker Hannifin Corp. 614,600
______________
2,438,500
______________
MEDIA - 2.0%
100,000 Regal Entertainment Group, Class A 1,524,000
______________
METALS & MINING - 1.8%
20,000 Southern Copper Corp. 590,000
6,000 BHP Billiton Ltd., ADR 389,040
12,500 Vale S.A., ADR 339,875
______________
1,318,915
______________
See Notes to Financial Statements Page 9
FIRST TRUST ACTIVE DIVIDEND INCOME FUND
PORTFOLIO OF INVESTMENTS (A) - (CONTINUED)
MAY 31, 2010 (UNAUDITED)
SHARES DESCRIPTION VALUE
-------- --------------------------------------------- ---------------
COMMON STOCKS - (CONTINUED)
MULTILINE RETAIL - 0.4%
35,000 Saks, Inc. (b) $ 321,300
______________
OIL, GAS & CONSUMABLE FUELS - 9.4%
10,000 Anadarko Petroleum Corp. 523,300
40,000 Atlas Energy, Inc. (b) 1,235,200
10,000 Cimarex Energy Co. 734,800
20,000 Copano Energy LLC 490,600
15,000 Devon Energy Corp. 957,750
30,000 Encana Corp. 925,500
2,000 Frontline Ltd. 65,780
15,000 Nordic American Tanker Shipping Ltd. 426,000
75,000 Pengrowth Energy Trust 711,000
20,000 Penn West Energy Trust 384,000
5,000 Total S.A., ADR 233,150
15,000 Vanguard Natural Resources LLC 319,200
______________
7,006,280
______________
PHARMACEUTICALS - 2.2%
50,000 Merck & Co., Inc. 1,684,500
______________
REAL ESTATE INVESTMENT TRUSTS (REITS) - 3.4%
15,000 Rayonier, Inc. 673,200
110,000 Annaly Capital Management, Inc. 1,865,600
______________
2,538,800
______________
ROAD & RAIL - 0.8%
10,000 Canadian National Railway Co. 573,700
______________
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 6.4%
2,500 Analog Devices, Inc. 72,925
60,000 Broadcom Corp., Class A 2,071,200
100,000 Intel Corp. 2,142,000
10,000 Microchip Technology, Inc. 278,500
12,000 National Semiconductor Corp. 168,600
5,000 Skyworks Solutions, Inc. (b) 79,650
______________
4,812,875
______________
SOFTWARE - 2.6%
25,000 Microsoft Corp. 645,000
11,000 Salesforce.com, Inc. (b) 951,830
5,000 VMware, Inc., Class A (b) 331,050
______________
1,927,880
______________
SPECIALTY RETAIL - 0.5%
10,000 Home Depot (The), Inc. 338,600
______________
TOBACCO - 2.5%
4,000 Altria Group, Inc. 81,160
2,500 Lorillard, Inc. 178,725
1,000 Philip Morris International, Inc. 44,120
30,000 Reynolds American, Inc. 1,564,200
______________
1,868,205
______________
WIRELESS TELECOMMUNICATION SERVICES - 0.8%
30,000 Vodafone Group PLC, ADR 603,000
______________
TOTAL COMMON STOCKS - 91.5% 68,527,185
(Cost $70,967,325) ______________
Page 10 See Notes to Financial Statements
FIRST TRUST ACTIVE DIVIDEND INCOME FUND
PORTFOLIO OF INVESTMENTS (A) - (CONTINUED)
MAY 31, 2010 (UNAUDITED)
SHARES/
UNITS DESCRIPTION VALUE
-------- --------------------------------------------- ---------------
MASTER LIMITED PARTNERSHIPS - 6.4%
OIL, GAS & CONSUMABLE FUELS
30,000 Enterprise Products Partners, L.P. $ 1,008,000
25,000 Genesis Energy, L.P. 442,000
30,000 Kinder Morgan Energy Partners, L.P. 1,905,000
12,000 Natural Resource Partners, L.P. 268,920
15,000 Niska Gas Storage Partners LLC (b) 282,750
45,000 Penn Virginia GP Holdings, L.P. 803,250
5,000 Targa Resource Partners, L.P. 113,250
______________
TOTAL MASTER LIMITED PARTNERSHIPS 4,823,170
(Cost $5,016,896) ______________
TOTAL INVESTMENTS - 97.9% 73,350,355
(Cost $75,984,221) (c)
NET OTHER ASSETS AND LIABILITIES - 2.1% 1,570,274
______________
NET ASSETS - 100.0% $ 74,920,629
==============
- --------------
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) Non-income producing security.
(c) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of May 31, 2010, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $527,937 and the aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over value was $3,161,803.
ADR - American Depositary Receipt
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of May 31, 2010
is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
LEVEL 1 SIGNIFICANT SIGNIFICANT
TOTAL VALUE QUOTED OBSERVABLE UNOBSERVABLE
AT 5/31/2010 PRICES INPUTS INPUTS
------------- ---------- ----------- ------------
Common Stocks* $ 68,527,185 $ 68,527,185 $ - $ -
Master Limited Partnerships* 4,823,170 4,823,170 - -
____________ ____________ _______ _______
Total Investments $ 73,350,355 $ 73,350,355 $ - $ -
============ ============ ======= =======
* See the Portfolio of Investments for industry breakout.
See Notes to Financial Statements Page 11
FIRST TRUST ACTIVE DIVIDEND INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2010 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $75,984,221) $ 73,350,355
Cash 805,926
Prepaid expenses 17,667
Receivables:
Investment securities sold 21,542,315
Dividends 1,237,093
Interest 120
______________
Total Assets 96,953,476
______________
LIABILITIES:
Payables:
Investment securities purchased 21,863,108
Investment advisory fees 65,776
Audit and tax fees 22,823
Offering costs 27,790
Legal fees 14,488
Custodian fees 12,520
Printing fees 11,513
Trustees' fees and expenses 6,380
Administrative fees 5,833
Transfer agent fees 2,512
Other liabilities 104
______________
Total Liabilities 22,032,847
______________
NET ASSETS $ 74,920,629
==============
NET ASSETS CONSIST OF:
Paid-in capital $ 144,134,825
Par value 77,542
Accumulated net investment income (loss) 844,032
Accumulated net realized gain (loss) on investments (67,501,904)
Net unrealized appreciation (depreciation) on investments (2,633,866)
______________
NET ASSETS $ 74,920,629
==============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share) $ 9.66
==============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized) 7,754,224
==============
Page 12 See Notes to Financial Statements
FIRST TRUST ACTIVE DIVIDEND INCOME FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 2010 (UNAUDITED)
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $102,081) $ 5,916,037
Interest 526
______________
Total investment income 5,916,563
______________
EXPENSES:
Investment advisory fees 399,207
Excise tax expense 75,000
Administrative fees 44,999
Custodian fees 38,682
Printing fees 26,610
Trustees' fees and expenses 19,457
Legal fees 19,149
Audit and tax fees 18,324
Offering costs 17,267
Transfer agent fees 9,772
Other 21,477
______________
Total expenses 689,944
______________
NET INVESTMENT INCOME (LOSS) 5,226,619
______________
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments (3,389,346)
Net change in unrealized appreciation (depreciation) on investments (3,384,000)
______________
NET REALIZED AND UNREALIZED GAIN (LOSS) (6,773,346)
______________
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (1,546,727)
==============
See Notes to Financial Statements Page 13
FIRST TRUST ACTIVE DIVIDEND INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
5/31/2010 ENDED
(UNAUDITED) 11/30/2009
--------------- ----------------
OPERATIONS:
Net investment income (loss) $ 5,226,619 $ 13,693,715
Net realized gain (loss) on investments (3,389,346) 1,048,844
Net change in unrealized appreciation (depreciation) on investments (3,384,000) (2,413,505)
______________ _____________
Net increase (decrease) in net assets resulting from operations (1,546,727) 12,329,054
______________ _____________
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (5,953,921) (13,276,526)
______________ _____________
Total distributions to shareholders (5,953,921) (13,276,526)
______________ _____________
CAPITAL TRANSACTIONS:
Proceeds from sale of Common Shares sold through shelf offering 6,004,407 354,746
Proceeds from Common Shares reinvested 220,580 332,606
______________ _____________
Net increase (decrease) in net assets resulting from capital transactions 6,224,987 687,352
______________ _____________
Total increase (decrease) in net assets (1,275,661) (260,120)
NET ASSETS:
Beginning of period 76,196,290 76,456,410
______________ _____________
End of period $ 74,920,629 $ 76,196,290
============== =============
Accumulated net investment income (loss) at end of period $ 844,032 $ 1,571,334
============== =============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period 7,267,804 7,205,236
Common Shares sold through shelf offering 467,383 29,820
Common Shares issued as reinvestment under the Dividend Reinvestment Plan 19,037 32,748
______________ _____________
Common Shares at end of period 7,754,224 7,267,804
============== =============
Page 14 See Notes to Financial Statements
FIRST TRUST ACTIVE DIVIDEND INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR YEAR PERIOD
5/31/2010 ENDED ENDED ENDED
(UNAUDITED) 11/30/2009 11/30/2008 11/30/2007 (a)
_______________ _____________ _____________ _______________
Net asset value, beginning of period $ 10.48 $ 10.61 $ 19.03 $ 19.10(b)
____________ ___________ ___________ ___________
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (c) 0.69 1.90 1.78 0.52
Net realized and unrealized gain (loss) (0.86) (0.20) (7.99) (0.55)
____________ ___________ ___________ ___________
Total from investment operations (0.17) 1.70 (6.21) (0.03)
____________ ___________ ___________ ___________
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.78) (1.84) (1.97) -
Net realized gain - - (0.24) -
____________ ___________ ___________ ___________
Total distributions (0.78) (1.84) (2.21) -
____________ ___________ ___________ ___________
Common Shares offering costs charged to paid-in capital - - - (0.04)
____________ ___________ ___________ ___________
Premiums from shares sold in at the market offering 0.13 1.01 - -
____________ ___________ ___________ ___________
Net asset value, end of period $ 9.66 $ 10.48 $ 10.61 $ 19.03
============ =========== =========== ===========
Market value, end of period $ 10.23 $ 12.10 $ 8.03 $ 17.78
============ =========== =========== ===========
TOTAL RETURN BASED ON NET ASSET VALUE (d) (1.63)% 18.44% (34.64)% (0.37)%(e)
============ =========== =========== ===========
TOTAL RETURN BASED ON MARKET VALUE (d) (9.68)% 80.51% (47.00)% (11.10)%
============ =========== =========== ===========
___________________________________________________
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 74,921 $ 76,196 $ 76,456 $ 137,117
Ratio of total expenses to average net assets 1.73%(f) 1.89% 1.31% 1.44%(f)
Ratio of net investment income to average net assets 13.09%(f) 19.31% 11.34% 13.87%(f)
Portfolio turnover rate 792% 2,030% 1,722% 178%
___________________________________________________
(a) Initial seed date of July 19, 2007. The Fund commenced operations on
September 20, 2007.
(b) Net of sales load of $0.90 per share on initial shares issued.
(c) Based on average shares outstanding.
(d) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by the
Dividend Reinvestment Plan and changes in net asset value per share for net
asset value returns and changes in Common Share price for market value
returns. Total returns do not reflect sales load and are not annualized for
periods less than one year. Past performance is not indicative of future
results.
(e) In 2007, the Fund received a reimbursement from the investment sub-advisor
in the amount of $3,067. This reimbursement from the sub-advisor represents
less than $0.01 and had no effect on the Fund's total return.
(f) Annualized.
See Notes to Financial Statements Page 15
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FIRST TRUST ACTIVE DIVIDEND INCOME FUND
MAY 31, 2010 (UNAUDITED)
1. FUND DESCRIPTION
First Trust Active Dividend Income Fund (the "Fund") is a diversified,
closed-end management investment company organized as a Massachusetts business
trust on June 14, 2007 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 FAV on the New York Stock
Exchange ("NYSE").
The Fund's primary investment objective is to seek a high level of current
income. It has a secondary objective of capital appreciation. The Fund seeks to
achieve its objectives by investing at least 80% of its Managed Assets (as
defined below) in a diversified portfolio of dividend-paying, multi-cap equity
securities of both U.S. and non-U.S. issuers that Aviance Capital Management,
LLC ("Aviance" or the "Sub-Advisor") believes offer the potential for attractive
income and/or capital appreciation. Managed Assets are defined as the value of
the securities and other investments the Fund holds plus cash and other assets,
including dividends accrued but not yet received, minus accrued liabilities
other than the principal amount of any borrowings. There can be no assurance
that the Fund's investment objectives will be achieved.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Fund's Common Shares is determined daily as
of the close of regular trading on the NYSE, normally 4:00 p.m. Eastern time, on
each day the NYSE is open for trading. Domestic debt securities and foreign
securities are priced using data reflecting the earlier closing of the principal
markets for those securities. The NAV per Common Share is calculated by dividing
the value of all assets of the Fund (including accrued dividends), less all
liabilities (including accrued expenses, dividends declared but unpaid and any
borrowings of the Fund) by the total number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value according
to procedures adopted by the Fund's Board of Trustees. A majority of the Fund's
assets are valued using market information supplied by third parties. In the
event that market quotations are not readily available, the pricing service does
not provide a valuation for a particular asset, or the valuations are deemed
unreliable, the Fund's Board of Trustees has designated First Trust Advisors
L.P. ("First Trust") to use a fair value method to value the Fund's securities
and other investments. Additionally, if events occur after the close of the
principal markets for particular securities (e.g., domestic debt and foreign
securities), but before the Fund values its assets, that could materially affect
NAV, First Trust may use a fair value method to value the Fund's securities and
other investments. The use of fair value pricing by the Fund is governed by
valuation procedures adopted by the Fund's Board of Trustees, in accordance with
the provisions of the 1940 Act.
Portfolio securities listed on any exchange other than the NASDAQ National
Market ("NASDAQ") or the London Stock Exchange Alternative Investment Market
("AIM") are valued at the last sale price on the business day as of which such
value is being determined. If there has been no sale on such day, or no official
closing price in the case of securities traded on the NASDAQ or the AIM, the
securities are valued at the mean of the most recent bid and asked prices on
such day. Securities listed on the NASDAQ or the AIM are valued at the official
closing price on the business day as of which such value is being determined.
Portfolio securities traded on more than one securities exchange are valued at
the last sale price on the business day as of which such value is being
determined at the close of the exchange representing the principal market for
such securities. Portfolio securities traded in the over-the-counter market, but
excluding securities trading on the NASDAQ or the AIM, are valued at the closing
bid prices. Short-term investments that mature in less than 60 days when
purchased are valued at amortized cost.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows
- Level 1 - Level 1 inputs are quoted prices in active markets for
identical securities. An active market is a market in which
transactions for the security occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
- Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar securities in active markets.
o Quoted prices for identical or similar securities in markets that
are non-active. A non-active market is a market where there are
few transactions for the security, the prices are not current, or
price quotations vary substantially either over time or among
market makers, or in which little information is released
publicly.
o Inputs other than quoted prices that are observable for the
security (for example, interest rates and yield curves observable
at commonly quoted intervals, volatilities, prepayment speeds,
loss severities, credit risks, and default rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
- Level 3 - Level 3 inputs are unobservable inputs. Unobservable inputs
reflect the reporting entity's own assumptions about the assumptions
that market participants would use in pricing the security.
Page 16
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (Continued)
- --------------------------------------------------------------------------------
FIRST TRUST ACTIVE DIVIDEND INCOME FUND
MAY 31, 2010 (UNAUDITED)
The inputs or methodology used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities. A summary
of the inputs used to value the Fund's investments as of May 31, 2010, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income, if any, is
recorded on the accrual basis.
Distributions received from the Fund's investments in Master Limited
Partnerships ("MLPs") generally are comprised of return of capital from the MLP
to the extent of the cost basis of such MLP investments. Cumulative
distributions received in excess of the Fund's cost basis in an MLP generally
are recorded as dividend income.
C. 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. Distributions of any net long-term capital gains earned by the
Fund are distributed at least annually. Distributions will automatically be
reinvested into additional Common Shares pursuant to the Fund's Dividend
Reinvestment Plan unless cash distributions are elected by the shareholder.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from accounting principles generally
accepted in the United States of America. These differences are primarily due to
differing treatments of income and gains on various investment securities held
by the Fund, timing differences and differing characterization of distributions
made by the Fund.
The tax character of distributions paid during the fiscal year ended November
30, 2009 was as follows:
Distributions paid from:
Ordinary Income $13,276,526
Long-Term Capital Gain -
As of November 30, 2009, the components of distributable earnings on a tax basis
were as follows:
Undistributed Ordinary Income $ 1,557,587
Net Unrealized Appreciation (Depreciation) (611,944)
Accumulated Capital and Other Losses (62,736,733)
D. INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes.
Certain capital losses realized after October 31 may be deferred and treated as
occurring on the first day of the following fiscal year. For the fiscal year
ended November 30, 2009, the Fund elected to defer capital losses occurring
between November 1, 2009 and November 30, 2009 in the amount of $344,837.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At November 30, 2009, the
Fund had a capital loss carryforward for federal income tax purposes of
$62,391,896, with $44,083,569 and $18,308,327 expiring on November 30, 2016 and
2017, respectively.
The Fund is subject to tax 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
2007, 2008 and 2009 remain open to federal and state audit. As of May 31, 2010,
management has evaluated the application of these standards to the Fund, and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax provisions.
E. EXPENSES:
The Fund pays all expenses directly related to its operations.
F. ACCOUNTING PRONOUNCEMENT:
In January 2010, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") No. 2010-06 "Improving Disclosures about
Fair Value Measurements." ASU 2010-06 amends FASB Accounting Standards
Codification Topic 820, Fair Value Measurements and Disclosures, to require
additional disclosures regarding fair value measurements. Certain disclosures
required by ASU No. 2010-06 are effective for interim and annual reporting
Page 17
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (Continued)
- --------------------------------------------------------------------------------
FIRST TRUST ACTIVE DIVIDEND INCOME FUND
MAY 31, 2010 (UNAUDITED)
periods beginning after December 15, 2009, and other required disclosures are
effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years. Management is currently evaluating the impact
ASU No. 2010-06 will have on the Fund's financial statement disclosures.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. First Trust
serves as investment advisor to the Fund pursuant to an Investment Management
Agreement. First Trust is responsible for the ongoing monitoring of the Fund's
investment portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
services, First Trust is entitled to a monthly fee calculated at an annual rate
of 1.00% of the Fund's Managed Assets.
Aviance serves as the Fund's sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor receives a monthly
portfolio management fee calculated at an annual rate of 0.50% of Managed Assets
that is paid by First Trust out of its investment advisory fee. FTIA Holdings,
LLC, an affiliate of the Advisor, holds a twenty-eight percent (28%) ownership
interest in Aviance.
PNC Global Investment Servicing (U.S.) Inc., an indirect, wholly-owned
subsidiary of The PNC Financial Services Group, Inc. ("PNC"), serves as the
Fund's Administrator, Fund Accountant and Transfer Agent in accordance with
certain fee arrangements. PFPC Trust Company, also an indirect, majority-owned
subsidiary of PNC, serves as the Fund's Custodian in accordance with certain fee
arrangements.
On July 1, 2010, The PNC Financial Services Group, Inc. sold the outstanding
stock of PNC Global Investment Servicing Inc. to The Bank of New York Mellon
Corporation. At the closing of the sale, PNC Global Investment Servicing (U.S.)
Inc. changed its name to BNY Mellon Investment Servicing (US) Inc. PFPC Trust
Company will not change its name until a later date to be announced.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid an annual retainer
of $10,000 per trust for the first 14 trusts of the First Trust Fund Complex and
an annual retainer of $7,500 per trust for each subsequent trust in the First
Trust Fund Complex. The annual retainer is allocated equally among each of the
trusts. No additional meeting fees are paid in connection with board or
committee meetings.
Additionally, the Lead Independent Trustee is paid $10,000 annually, the
Chairman of the Audit Committee is paid $5,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and the Valuation Committee
are paid $2,500 annually to serve in such capacities, with such compensation
paid by the trusts in the First Trust Fund Complex and divided among those
trusts. Trustees are also reimbursed by the trusts in the First Trust Fund
Complex for travel and out-of-pocket expenses in connection with all meetings.
The Lead Independent Trustee and each Committee chairman will serve two-year
terms ending on December 31, 2011, before rotating to serve as a chairman of
another committee or as Lead Independent Trustee. The officers and the
"Interested" Trustee receive no compensation from the Fund for serving in such
capacities.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, other than U.S.
government obligations and short-term obligations, for the six months ended May
31, 2010, were $612,568,963 and $606,730,570, respectively.
5. AT THE MARKET OFFERING
On November 13, 2009, the Fund, Advisor and Sub-Advisor entered into a sales
agreement with JonesTrading Institutional Services LLC ("JonesTrading") whereby
the Fund may offer and sell up to 1,000,000 Common Shares from time to time
through JonesTrading as agent for the offer and sale of the Common Shares.
Sales of Common Shares pursuant to the sales agreement may be made in negotiated
transactions or transactions that are deemed to be "at the market" as defined in
Rule 415 under the Securities Act of 1933, as amended, including sales made
directly on the NYSE or sales made through a market maker other than on an
exchange, at an offering price equal to or in excess of the net asset value per
share of the Fund's Common Shares at the time such Common Shares are initially
sold. The Fund has used the net proceeds from the sale of the Common Shares in
accordance with its investment objectives and policies. Transactions for the six
months ended May 31, 2010 and the fiscal year ended November 30, 2009 related to
offerings under the sales agreement are as follows
NET PROCEEDS
COMMON NET PROCEEDS NET ASSET VALUE RECEIVED IN EXCESS
SHARES SOLD RECEIVED OF SHARES SOLD OF NET ASSET VALUE
___________ ____________ _______________ __________________
Six Months Ended 5/31/2010* 467,383 $6,004,407 $5,003,981 $1,000,426
Year Ended 11/30/2009 29,820 $354,746 $315,479 $39,267
* Additionally, estimated offering costs of $17,267 related to this offering
for this reporting period have been expensed by the Fund and are -disclosed
as "offering costs" on the Statement of Operations.
Page 18
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (Continued)
- --------------------------------------------------------------------------------
FIRST TRUST ACTIVE DIVIDEND INCOME FUND
MAY 31, 2010 (UNAUDITED)
6. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
7. RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some of the risks
that should be considered for the Fund. For additional information about the
risks associated with investing in the Fund, please see the Fund's prospectus
and statement of additional information, as well as other Fund regulatory
filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. 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 equity 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.
DIVIDEND STRATEGY RISK: The Sub-Advisor may not be able to anticipate the level
of dividends that companies will pay in any given timeframe. The Fund's
strategies require the Sub-Advisor to identify and exploit opportunities such as
the announcement of major corporate actions that may lead to high current
dividend income. These situations are typically not recurring in nature or the
frequency may be difficult to predict and may not result in an opportunity that
allows the Sub-Advisor to fulfill the Fund's investment objectives. In addition,
the dividend policies of the Fund's target companies are heavily influenced by
the current economic climate.
MLP RISK: An investment in MLP units involves risks which differ from an
investment in common stock of a corporation. Holders of MLP units have limited
control and voting rights on matters affecting the partnership. In addition,
there are certain tax risks associated with an investment in MLP units and
conflicts of interest exist between common unit holders and the general partner,
including those arising from incentive distribution payments.
QUALIFIED DIVIDEND INCOME TAX RISK: There can be no assurance as to what portion
of the distributions paid to the Fund's Common Shareholders will consist of
tax-advantaged qualified dividend income. For taxable years beginning before
January 1, 2011, certain distributions designated by the Fund as derived from
qualified dividend income will be taxed in the hands of non-corporate Common
Shareholders at the rates applicable to long-term capital gains, provided
certain holding period and other requirements are satisfied by both the Fund and
the Common Shareholders. Additional requirements apply in determining whether
distributions by foreign issuers should be regarded as qualified dividend
income. Certain investment strategies of the Fund will limit the Fund's ability
to meet these requirements and consequently will limit the amount of qualified
dividend income received and distributed by the Fund. A change in the favorable
provisions of the federal tax laws with respect to qualified dividends may
result in a widespread reduction in announced dividends and may adversely impact
the valuation of the shares of dividend-paying companies.
8. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Fund through
the date the financial statements were issued, and has determined that besides
those subsequent events already disclosed there were the following subsequent
events:
On July 12, 2010, the Fund declared a dividend of $0.3200 per share to Common
Shareholders of record on July 23, 2010, payable July 30, 2010.
On July 14, 2010, the Fund, Advisor and Sub-Advisor entered into a sales
agreement with JonesTrading that terminated and replaced the sales agreement
referred to in Note 5 above and whereby the Fund may offer and sell up to
1,000,000 Common Shares from time to time through JonesTrading as agent for the
offer and sale of the Common Shares. Sales of Common Shares pursuant to the
sales agreement may be made in negotiated transactions or transactions that are
deemed to be "at the market" as defined in Rule 415 under the Securities Act of
1933, as amended, including sales made directly on the NYSE or sales made
through a market maker other than on an exchange, at an offering price equal to
or in excess of the net asset value per share of the Fund's Common Shares at the
time such Common Shares are initially sold. The Fund intends to use the net
proceeds from the sale of the Common Shares in accordance with its investment
objectives and policies.
Page 19
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
FIRST TRUST ACTIVE DIVIDEND INCOME FUND
MAY 31, 2010 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (formerly PNC Global Investment Servicing
(U.S.) Inc.) (the "Plan Agent"), in additional Common Shares under the Plan. If
you elect to receive cash distributions, you will receive all distributions in
cash paid by check mailed directly to you by the Plan Agent, as dividend paying
agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above NAV at the time of
valuation, the Fund will issue new shares at a price equal to the
greater of (i) NAV per Common Share on that date or (ii) 95% of the
market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and will
purchase Common Shares in the open market, on the NYSE or elsewhere,
for the participants' accounts. It is possible that the market price
for the Common Shares may increase before the Plan Agent has completed
its purchases. Therefore, the average purchase price per share paid by
the Plan Agent may exceed the market price at the time of valuation,
resulting in the purchase of fewer shares than if the dividend or
distribution had been paid in Common Shares issued by the Fund. The
Plan Agent will use all dividends and distributions received in cash
to purchase Common Shares in the open market within 30 days of the
valuation date except where temporary curtailment or suspension of
purchases is necessary to comply with federal securities laws.
Interest will not be paid on any uninvested cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (800) 334-1710, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in noncertificated 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 votes proxies relating to
portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
Page 20
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION - (CONTINUED)
- --------------------------------------------------------------------------------
FIRST TRUST ACTIVE DIVIDEND INCOME FUND
MAY 31, 2010 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available (1) by calling (800)
988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; (3)
on the SEC's website at http://www.sec.gov; and (4) for review and copying at
the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding
the operation of the PRR may be obtained by calling (800) SEC-0330.
SUBMISSION OF MATTERS TO A VOTE
A Special Meeting of the Shareholders of the Common Shares of the Fund was held
on February 18, 2010. At that meeting the shareholders approved a new
Sub-Advisory Agreement between the Fund, the Advisor and Aviance. 3,634,250
(50.13%) of the outstanding voting securities were voted at the meeting. The
number of votes cast in favor of the new Sub-Advisory Agreement was 3,256,080,
the number of votes against was 114,493 and the number of abstentions was
263,677. The terms of the new Sub-Advisory Agreement are substantially identical
to the terms of the previous Sub-Advisory Agreement. This action was taken to
continue to permit Aviance to serve as the Fund's Sub-Advisor. Prior to the
meeting Aviance had been serving as the Fund's Sub-Advisor pursuant to an
Interim Sub-Advisory Agreement which was approved by the Fund's Board of
Trustees and was necessitated by the termination of the previous Sub-Advisory
Agreement because of an assignment of that Sub-Advisory Agreement as defined in
the 1940 Act resulting from a "change of control" of Aviance caused by the
redistribution of certain outstanding ownership interests among its principal
owners.
The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, Energy Income and
Growth Fund, First Trust Enhanced Equity Income Fund, First Trust/Aberdeen
Global Opportunity Income Fund, First Trust/FIDAC Mortgage Income Fund, First
Trust Strategic High Income Fund, First Trust Strategic High Income Fund II,
First Trust/Aberdeen Emerging Opportunity Fund, First Trust Strategic High
Income Fund III, First Trust Specialty Finance and Financial Opportunities Fund
and First Trust Active Dividend Income Fund was held on April 14, 2010. At the
Annual Meeting, Trustees James A. Bowen and Niel B. Nielson were elected by the
Common Shareholders of the Fund as Class III Trustees for a three-year term
expiring at the Fund's annual meeting of shareholders in 2013. The number of
votes cast in favor of Mr. Bowen was 6,792,553, the number of votes against was
170,962 and the number of abstentions was 591,942. The number of votes cast in
favor of Mr. Nielson was 6,791,657, the number of votes against was 171,858 and
the number of abstentions was 591,942. Richard E. Erickson, Thomas R. Kadlec and
Robert F. Keith are the other current and continuing Trustees.
INVESTMENT MANAGEMENT AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AND
SUB-ADVISORY AGREEMENTS
The Board of Trustees of First Trust Active Dividend Income 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 Aviance Capital
Management, LLC (the "Sub-Advisor"), at a meeting held on March 21-22, 2010.
The Board determined that the terms of the Agreements are fair and reasonable
and that the Agreements continue to be in the best interests of the Fund.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. To assist the Board in its evaluation of the Agreements,
the Independent Trustees received a separate report from each of the Advisor and
the Sub-Advisor in advance of the Board meeting responding to a request for
information from counsel to the Independent Trustees. The reports, among other
things, outlined the services provided by the Advisor and the Sub-Advisor
(including the relevant personnel responsible for these services and their
experience); the advisory and sub-advisory fees for the Fund as compared to fees
charged to other clients of the Advisor and the Sub-Advisor and as compared to
fees charged by investment advisors and sub-advisors to comparable funds;
expenses of the Fund as compared to expense ratios of comparable funds; the
nature of expenses incurred in providing services to the Fund and the potential
for economies of scale, if any; financial data on the Advisor and the
Sub-Advisor; any fall out benefits to the Advisor and the Sub-Advisor; and
information on the Advisor's and the Sub-Advisor's compliance programs. The
Independent Trustees also met separately with their independent legal counsel to
discuss the information provided by the Advisor and the Sub-Advisor. The Board
applied its business judgment to determine whether the arrangements between the
Fund and the Advisor and among the Fund, the Advisor and the Sub-Advisor are
reasonable business arrangements from the Fund's perspective as well as from the
perspective of shareholders.
In reviewing the Agreements, the Board considered the nature, quality and extent
of services provided by the Advisor and the Sub-Advisor under the Agreements
and, for the Sub-Advisor, under the prior sub-advisory agreement (references to
the Sub-Advisory Agreement include the prior sub-advisory agreement, as
appropriate). The Board considered the Advisor's statements regarding the
incremental benefits associated with the Fund's advisor/sub-advisor management
structure. With respect to the Advisory Agreement, the Board considered that
the Advisor is responsible for the overall management and administration of the
Page 21
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION - (CONTINUED)
- --------------------------------------------------------------------------------
Fund, including the oversight of the Sub-Advisor. The Board noted the
compliance program that had been developed by the Advisor and considered that
the compliance program includes policies and procedures for monitoring the
Sub-Advisor's compliance with the 1940 Act and the Fund's investment objectives
and policies. The Board also noted the enhancements made by the Advisor to the
compliance program in 2009. With respect to the Sub-Advisory Agreement, the
Board received a presentation from a representative of the Sub-Advisor
discussing the services that the Sub-Advisor provides to the Fund and how the
Sub-Advisor manages the Fund's investments. The Board noted that, prompted by a
change in the Sub-Advisor's ownership that had terminated the prior sub-advisory
agreement, shareholders had approved the new Sub-Advisory Agreement at a special
meeting held on February 18, 2010. In light of the information presented and
the considerations made, the Board concluded that the nature, quality and extent
of services provided to the Fund by the Advisor and the Sub-Advisor under the
Agreements have been and are expected to remain satisfactory and that the
Sub-Advisor, under the oversight of the Advisor, has managed the Fund consistent
with its investment objectives and policies.
The Board considered the advisory and sub-advisory fees paid under the
Agreements. The Board considered the advisory fees charged by the Advisor to
similar funds and other non-fund clients, and noted that the Advisor does not
provide advisory services to other clients with investment objectives and
policies similar to the Fund's. The Board also considered information provided
by the Sub-Advisor as to the fees it charges to other clients, noting that the
sub-advisory fee rate is lower than the fee rate charged by the Sub-Advisor to
its other clients. In addition, the Board received data prepared by Lipper Inc.
("Lipper"), an independent source, showing the management fees and expense
ratios of the Fund as compared to the management fees and expense ratios of a
combined peer group selected by Lipper and the Advisor. The Board discussed
with representatives of the Advisor the limitations in creating a relevant peer
group for the Fund, including that (i) most peer funds do not employ an
advisor/sub-advisor management structure; (ii) the peer funds may not have the
same fiscal year as the Fund, which may cause the expense data used by Lipper to
be measured over different time periods; and (iii) many of the peer funds are
larger than the Fund. The Board reviewed the Lipper materials, but based on its
discussions with the Advisor, the Board determined that the Lipper data was of
limited value for purposes of its consideration of the renewal of the
Agreements.
The Board also considered performance information for the Fund, noting that the
performance information included the Fund's quarterly performance report, which
is part of the process that the Board has established for monitoring the Fund's
performance on an ongoing basis, and had been enhanced to assess portfolio risk
as well. The Board determined that this process continues to be effective for
reviewing the Fund's performance. In addition to the Board's ongoing review of
performance, the Board also received data prepared by Lipper comparing the
Fund's performance to the combined peer group selected by Lipper and the
Advisor, as well as to a larger group and to a benchmark. The Board reviewed
the Lipper materials, but for similar reasons to those described above, the
Board determined that the performance data provided by Lipper was of limited
value. In addition, the Board considered the market price and net asset value
performance of the Fund since inception, and compared the Fund's
premium/discount to the average and median premium/discount of the combined peer
group, noting that the Fund's market price for much of 2009 reflected a premium.
Based on the information provided and the Board's ongoing review of the Fund's
performance, the Board concluded that the Fund's performance was reasonable.
On the basis of all the information provided on the fees, expenses and
performance of the Fund, the Board concluded that the advisory and sub-advisory
fees were reasonable and appropriate in light of the nature, quality and extent
of services provided by the Advisor and Sub-Advisor under the Agreements.
The Board noted that the Advisor has continued to invest in personnel and
infrastructure and considered whether fee levels reflect any economies of scale
for the benefit of shareholders. The Board concluded that the advisory fee
reflects an appropriate level of sharing of any economies of scale at current
asset levels. The Board also considered the costs of the services provided and
profits realized by the Advisor from serving as investment manager to the Fund
for the twelve months ended December 31, 2009, as set forth in the materials
provided to the Board. The Board noted the inherent limitations in the
profitability analysis, and concluded that the Advisor's profitability appeared
to be not excessive in light of the services provided to the Fund. In addition,
the Board considered and discussed any ancillary benefits derived by the Advisor
from its relationship with the Fund and noted that the typical fall out benefits
to the Advisor such as soft dollars are not present. The Board concluded that
any other fall out benefits received by the Advisor or its affiliates would
appear to be limited.
The Board noted that the Sub-Advisor did not identify any economies of scale
realized in connection with providing services to the Fund and represented that
the Sub-Advisor was providing sub-advisory services to the Fund at a loss. The
Board considered the Advisor's representation that First Trust Portfolios L.P.,
an affiliate of the Advisor, had committed to provide any necessary financing
for the Sub-Advisor. The Board noted that the Sub-Advisor does not maintain any
soft-dollar arrangements and that the Sub-Advisor indicated that it does not
receive any material fall out benefits from its relationship to the Fund.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, determined that the terms of the
Agreements continue to be fair and reasonable and that the continuation of the
Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 22
This page left blank intentionally.
Page 23
This page left blank intentionally.
Page 24
[LOGO OMITTED]
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Aviance Capital Management, LLC
2080 Ringling Boulevard
Sarasota, FL 34237
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
PFPC Trust Company
8800 Tinicum Boulevard
Philadelphia, PA 19153
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
Inside Back Cover
[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 has been no change, 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 recently filed annual report on Form N-CSR.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of trustees, 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 Active Dividend Income Fund
------------------------------------------------
By (Signature and Title)* /s/ James A. Bowen
-----------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date July 20, 2010
-----------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ James A. Bowen
-----------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date July 20, 2010
-----------------------
By (Signature and Title)* /s/ Mark R. Bradley
-----------------------------------------------------
Mark R. Bradley, Treasurer, Controller, Chief
Financial Officer and Chief Accounting Officer
(principal financial officer)
Date July 20, 2010
-----------------------
* Print the name and title of each signing officer under his or her signature.