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 811-22452
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First Trust Series Fund
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
Registrant's telephone number, including area code: (630) 765-8000
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Date of fiscal year end: October 31
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Date of reporting period: October 31, 2014
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST
First Trust Preferred
Securities and Income Fund
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Annual Report
For the Year Ended October 31, 2014
STONEBRIDGE
Advisors LLC
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TABLE OF CONTENTS
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FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
ANNUAL REPORT
OCTOBER 31, 2014
Shareholder Letter .......................................................... 1
At a Glance ................................................................. 2
Portfolio Commentary ........................................................ 4
Understanding Your Fund Expenses ............................................ 7
Portfolio of Investments .................................................... 8
Statement of Assets and Liabilities ......................................... 13
Statement of Operations ..................................................... 14
Statements of Changes in Net Assets ......................................... 15
Financial Highlights ........................................................ 16
Notes to Financial Statements ............................................... 21
Report of Independent Registered Public Accounting Firm ..................... 29
Additional Information ...................................................... 30
Board of Trustees and Officers .............................................. 34
Privacy Policy .............................................................. 36
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 Stonebridge Advisors LLC ("Stonebridge" 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 Preferred Securities and 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 objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of Fund shares
may therefore be less than what you paid for them. Accordingly, you can lose
money by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns and net asset value 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.
The statistical information that follows may help you understand the Fund's
performance compared to that of relevant market benchmarks.
The risks of investing in the Fund are spelled out in the prospectus, the
statement of additional information, this report and other Fund regulatory
filings.
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SHAREHOLDER LETTER
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FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
ANNUAL REPORT
OCTOBER 31, 2014
Dear Shareholders:
I am pleased to present you with the annual report for your investment in First
Trust Preferred Securities and Income Fund (the "Fund"). This report provides
detailed information about the Fund, including a performance review and the
financial statements for the past 12 months. I encourage you to read this
document and discuss it with your financial advisor.
Although markets have seemed choppy over the past 12 months, the U.S. has shown
sustained growth over the period. In fact, the S&P 500(R) Index, as measured on
a total return basis, rose 17.27% during the period. First Trust Advisors L.P.
("First Trust") believes that staying invested in quality products through
different types of markets can benefit investors over the long term.
First Trust offers a variety of products that we believe could fit the financial
plans for many investors seeking long-term investment success. We invite you to
look at our investment products with your financial advisor to determine if any
of them might fit your financial goals. We believe that regularly discussing
your financial objectives and investment options with your financial advisor can
help keep you on track.
First Trust will continue to make available up-to-date information about your
investments so you and your financial advisor are current on any First Trust
investments you own. We value our relationship with you, and thank you for the
opportunity to assist you in achieving your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
"AT A GLANCE"
AS OF OCTOBER 31, 2014 (UNAUDITED)
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FUND STATISTICS
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FIRST TRUST PREFERRED SECURITIES NET ASSET
AND INCOME FUND VALUE (NAV)
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Class A (FPEAX) $21.20
Class C (FPECX) $21.24
Class F (FPEFX) $21.37
Class I (FPEIX) $21.27
Class R3 (FPERX) $21.20
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% OF TOTAL
TOP TEN HOLDINGS INVESTMENTS
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Liberty Mutual Group, Inc. 3.4%
Aquarius + Investments PLC for Swiss
Reinsurance Co., Ltd. 3.1
Enel SpA 2.4
CHS, Inc., Series 2 2.2
Land O'Lakes Capital Trust I 2.1
CoBank ACB, Series F 2.1
SCANA Corp. 2.1
Principal Financial Group, Inc., Series A 2.0
Lloyds Bank PLC 1.9
Ares Capital Corp. 1.9
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Total 23.2%
=======
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% OF TOTAL
SECTOR ALLOCATION INVESTMENTS
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Financials 83.4%
Utilities 9.1
Consumer Staples 5.5
Telecommunication Services 2.0
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Total 100.0%
=======
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% OF TOTAL
CREDIT QUALITY(1) INVESTMENTS
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A+ 1.2%
A- 3.7
BBB+ 18.4
BBB 10.7
BBB- 26.1
BB+ 12.5
BB 13.8
BB- 5.6
B+ 0.1
NR 7.9
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Total 100.0%
=======
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CLASS CLASS CLASS CLASS CLASS
DIVIDEND DISTRIBUTIONS A SHARES C SHARES F SHARES I SHARES R3 SHARES
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Current Monthly Distribution per Share (2) $0.0931 $0.0798 $0.0948 $0.0975 $0.0887
Current Distribution Rate on NAV (3) 5.27% 4.51% 5.32% 5.50% 5.02%
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(1) The credit quality and ratings information presented above reflects the
ratings assigned by one or more nationally recognized statistical rating
organizations (NRSROs), including Standard & Poor's Ratings Group, a
division of The McGraw-Hill Companies, Inc., Moody's Investors Service,
Inc., Fitch Ratings or a comparably rated NRSRO. For situations in which a
security is rated by more than one NRSRO and the ratings are not
equivalent, the highest ratings are used. Sub-investment grade ratings are
those rated BB+/Ba1 or lower. Investment grade ratings are those rated
BBB-/Baa3 or higher. The credit ratings shown relate to the
creditworthiness of the issuer of the underlying securities in the Fund
and not the Fund or its shares. Credit ratings are subject to change.
(2) Most recent distribution paid or declared through 10/31/2014. Subject to
change in the future.
(3) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
NAV as of 10/31/2014. Subject to change in the future.
NR Not Rated
Page 2
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
"AT A GLANCE" (CONTINUED)
AS OF OCTOBER 31, 2014 (UNAUDITED)
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PERFORMANCE OF A $10,000 INVESTMENT
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This chart compares your Fund's Class I performance to that
of the BofA Merrill Lynch Fixed Rate Preferred Securities
Index, the BofA Merrill Lynch U.S. Capital Securities Index
and the Blended Benchmark(a) from 1/11/2011 through
10/31/2014.
First Trust Preferred BofA Merrill Lynch BofA Merrill Lynch
Securities and Fixed Rate Preferred U.S. Capital
Income Fund - Securities Index Securities Index Blended
Class I Shares ("POP1") ("C0CS") Index (a)
1/11/11 $10,000 $10,000 $10,000 $10,000
4/30/11 10,393 10,454 10,484 10,469
10/31/11 10,521 10,521 10,138 10,330
4/30/12 11,475 11,142 10,861 11,002
10/31/12 12,398 11,847 11,958 11,903
4/30/13 12,931 12,288 12,651 12,470
10/31/13 11,894 11,553 12,711 12,132
4/30/14 12,715 12,485 13,445 12,965
10/31/14 13,158 12,992 13,899 13,446
(a) The Blended Index return is a 50/50 split between the BofA Merrill Lynch
Fixed Rate Preferred Securities Index and BofA Merrill Lynch U.S. Capital
Securities Index.
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PERFORMANCE AS OF OCTOBER 31, 2014
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A SHARES C SHARES F SHARES I SHARES R3 SHARES BLENDED P0P1* C0CS*
Inception Inception Inception Inception Inception INDEX* BofA Merril BofA Merrill
2/25/2011 2/25/2011 3/2/2011 1/11/2011 3/2/2011 Lynch Fixed Lynch U.S.
Rate Capital
Preferred Securities
Securities Index
Index
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W/MAX
1.00%
W/MAX CONTINGENT
W/O 4.50% W/O DEFERRED W/O W/O W/O W/O W/O W/O
AVERAGE ANNUAL SALES SALES SALES SALES SALES SALES SALES SALES SALES SALES
TOTAL RETURNS CHARGES CHARGE CHARGES CHARGE CHARGES CHARGES CHARGES CHARGES CHARGES CHARGES
1 Year 10.35% 5.39% 9.56% 8.51% 10.48% 10.65% 10.14% 10.91% 12.45% 9.35%
Since Inception 7.02% 5.69% 6.27% 6.27% 7.23% 7.48% 6.61% 8.10% 7.12% 9.04%
30-Day SEC Yield(1) 4.12% 3.54% 4.43% 4.53% 4.16% N/A N/A N/A
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* Since inception return is based on the Class I Shares inception date.
Performance figures assume reinvestment of all dividend distributions and do not
reflect the deduction of taxes that the shareholder would pay on Fund
distributions or the redemption of Fund shares. The total returns would have
been lower if certain fees had not been waived and expenses reimbursed by the
Advisor and Sub-Advisor. An index is a statistical composite that tracks a
specific financial market or sector. Unlike the Fund, the indices do not
actually hold a portfolio of securities and therefore do not incur the expenses
incurred by the Fund. These expenses negatively impact the performance of the
Fund. The Fund's past performance does not predict future performance.
Performance of share classes will vary due to differences in sales charges and
expenses. Total return with sales charges includes payment of the maximum sales
charge of 4.50% for Class A Shares, a contingent deferred sales charge ("CDSC")
of 1.00% for Class C Shares in year one and 12b-1 service fees of 0.25% per year
of average daily net assets for Class A Shares and combined Rule 12b-1
distribution and service fees of 1.00% per year of average daily net assets for
Class C Shares. Class F, Class I and Class R3 Shares do not have a front-end
sales charge or a CDSC; therefore, performance is at net asset value. The Rule
12b-1 service fees are 0.15% of average daily net assets for Class F Shares and
combined Rule 12b-1 distribution and service fees are 0.50% of average daily net
assets for Class R3 Shares, while Class I Shares do not have these fees. Prior
to December 15, 2011, Class R3 Shares combined Rule 12b-1 distribution and
service fees were 0.75% of average daily net assets.
(1) 30-day SEC yield is calculated by dividing the net investment income per
share earned during the most recent 30-day period by the maximum offering
price per share on the last day of the period. The reported SEC yields are
subsidized. The subsidized yields reflect the fee waiver and/or
reimbursement of Fund expenses, which has the effect of lowering the
Fund's expense ratio and generating a higher yield.
Page 3
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PORTFOLIO COMMENTARY
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FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
ANNUAL REPORT
OCTOBER 31, 2014
SUB-ADVISOR
Stonebridge Advisors LLC ("Stonebridge" or the "Sub-Advisor") is the Sub-Advisor
to First Trust Preferred Securities and Income Fund (the "Fund") and is a
registered investment advisor based in Wilton, Connecticut. Stonebridge
specializes in the management of preferred securities and North American equity
income securities.
PORTFOLIO MANAGEMENT TEAM
SCOTT T. FLEMING - PRESIDENT AND CIO OF STONEBRIDGE ADVISORS LLC
ALLEN SHEPARD, PHD - VICE PRESIDENT, SENIOR RISK ANALYST AND PORTFOLIO ANALYTICS
ROBERT WOLF - VICE PRESIDENT, PORTFOLIO MANAGER AND SENIOR CREDIT ANALYST
DANIELLE SALTERS, CFA - CREDIT ANALYST
COMMENTARY
MARKET RECAP
The fiscal year ended October 31, 2014 was a period of strong returns for the
preferred and hybrid markets. Duration was a major driver of performance
throughout most of the period, with longer-duration securities outperforming as
investors' expectations changed regarding the Federal Reserve's (the "Fed")
interest rate policy. The beginning of the Fed's asset purchase taper during the
fourth quarter of 2013 caused significant investor wariness and underperformance
of long-duration securities. During the last two months of 2013, the Treasury
markets sold off and the 10-year interest rate increased to a period high on
December 27, 2013 of 3.11%. These events, along with tax-loss selling at the end
of 2013, weighed on the retail and institutional markets. However, as investors
began to recognize that changes in monetary policy would remain accommodative
and incremental, the 10-year rate slid back to 2.40% by October 31, 2014 and
preferred and hybrid securities had very strong year-to-date performance.
Underlying the strength in the preferred and hybrid markets was the continued
stabilization and growth of the U.S. economy, as unemployment during the period
dropped from 7.2% to 5.8%. After a sluggish start to the first quarter of 2014
due to weather conditions, real GDP grew in the second and third quarters. In
Europe, the European Central Bank ("ECB") President, Mario Draghi, took historic
measures to make the ECB's central banking policy more accommodative and counter
the threat of deflation. This included broad-based asset buying with the
potential of investments in the European corporate bond market. To cap off the
period, the ECB's Asset Quality Review (AQR) and Stress Test went by without any
major negative headlines, as banks continued to bolster capital levels to work
toward Basel III compliance. Also, Japan ended October 2014 with its
announcement of a large monetary stimulus program, which bolstered markets
across the globe.
These developments in the U.S., Asia, and Europe helped to support the strong
performance and stable inflows into the preferred and hybrid space, despite a
number of geopolitical events that created fleeting spikes of volatility within
the markets. However, as investors recognized the excess spread and yield
available in the preferred market as well as the improved creditworthiness and
capitalization of financials, the markets were able to withstand negative
headlines and show strength throughout the period.
PERFORMANCE ANALYSIS
The Fund's Class I shares produced a total return of 10.65% for the fiscal year
ended October 31, 2014, underperforming the blended index (a 50/50 blend of the
BofA Merrill Lynch Fixed Rate Preferred Securities Index ("P0P1") and the BofA
Merrill Lynch U.S. Capital Securities Index ("C0CS")) by 0.26%. Underperformance
was driven by the Fund's conservative interest-rate stance throughout the
period, as it consistently positioned the effective duration of the Fund to be
at least 1.25 years lower than the blended index, while also increasing the
portfolio's current yield.
In order to better protect investors against a rise in rates, the Fund decreased
its duration from 6.1 at the start the period to 4.43 at the end of the period.
This was accomplished by maintaining an overweight in shorter-duration
securities and utilizing defensive interest-rate derivatives, which were both
negative contributors to relative performance. However, this was partially
Page 4
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
ANNUAL REPORT
OCTOBER 31, 2014
offset by security selection, as the Fund produced higher returns within each
duration bucket over the period, as evidenced by the below table.
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FUND P0P1C0CS BLEND
------------------------------------------------- -------------------------------------------------
AVERAGE TOTAL CONTRIBUTION AVERAGE TOTAL CONTRIBUTION
DURATION WEIGHT RETURN TO RETURN WEIGHT RETURN TO RETURN
--------------- ------------------------------------------------- -------------------------------------------------
TOTAL 100.00% 10.65% 10.65% 100.00% 10.91% 10.91%
--------------- ---------------------------------------------------------------------------------------------------
CASH 1.44% 0.00% 0.00% 0.17% 0.00% 0.00%
0-3 Years 29.82% 7.35% 2.27% 25.74% 5.85% 1.59%
3-5 Years 21.85% 9.18% 2.05% 14.31% 7.53% 1.07%
5-8 Years 32.24% 12.74% 3.97% 31.07% 10.81% 3.34%
8-12 Years 12.21% 18.06% 1.81% 18.39% 17.54% 3.09%
>12 Years 2.44% 19.71% 0.55% 10.32% 18.82% 1.82%
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The negative impact of being underweight duration was partially offset by the
Fund's overweight in $25 par securities, higher-coupon securities, and
non-investment grade securities, as well as security selection within
variable-rate securities. A core part of the Fund's defensive interest-rate
strategy included increasing its weighting in high-coupon, near-term callable
securities that were likely to be redeemed. The Fund also benefited from a 15%
overweight in $25 par securities, which returned 1.24% more than $1,000 par
securities during the period. Additionally, the Fund's variable rate securities
outperformed those in the blended index by 3.3% due to the Fund's focus on
selecting variable-rate securities with lower extension risk and overweighting
securities with more defensive back-ends. Over the period, the Fund increased
its variable-rate weighting to 65.8% to end the period from the 45.7% at the
beginning of the period. Finally, the inclusion of 15.5% non-investment-grade
securities within the Fund compared to none in the blended index was a positive
contributor to relative performance, as guideline changes for the Fund allowed
more flexibility within the non-investment grade universe.
Overall, the Fund underperformed the blended index during the period because of
its more conservative stance regarding interest-rate risk and duration, but was
able to offset most of the underperformance with security selection while
increasing dividends available for distribution.
MARKET AND FUND OUTLOOK
Preferred and hybrid securities have been one of the best-performing asset
classes year-to-date. Assuming the global financial markets remain stable, we
believe this positive trend will likely continue. We also believe there will be
a benefit to the market from the recent positive results of the ECB AQR and
Stress Test, which should provide more stability to the European hybrid capital
market going forward. The continued accommodative stance of global central banks
leads us to believe that we are likely to remain in a benign, low-rate
environment over the near term, which should be a positive for preferred
securities. The excess spread or yield built into preferreds relative to
Treasuries and investment-grade corporates continues to prove attractive
relative to most asset classes and should provide support for preferreds, in our
opinion.
The primary issuance market for banks is likely to be a driver of performance
both in the preferred and hybrid space as well as corporate bonds. We are
anticipating a continuation of robust issuance into next year and beyond due to
banks working to meet regulatory requirements. Banks will continue to issue
additional tier 1 (AT1) but are also expected to significantly increase issuance
of senior debt over the next few years to satisfy leverage ratios and total loss
absorbing capacity (TLAC) requirements. New issuance both in the U.S. and Europe
has the potential of slightly re-pricing the market wider, especially if the
market is subject to a large number of new issues over a short time frame.
Preferreds and hybrids remain very attractive relative to other asset classes
due to their above-average yields. As of October 31, 2014, the P0P1 Index
currently yields 6.19%, which is over 2% more than investment-grade corporate
securities and only 0.5% less than high-yield corporate securities. The C0CS
Institutional Index yields 5.81%, 38 basis points lower than P0P1, yet it
provides more yield than all other investment-grade asset classes. On a spread
to Treasury basis, the current spreads of P0P1 and C0CS to the 10-year Treasury
are 384 basis points and 346 basis points, respectively. The financial sector's
heightened regulation, coupled with significantly improved capitalization for
the banking industry, leads us to believe that there is room for further spread
compression of preferreds back to pre-crisis levels, which are approximately 100
Page 5
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
ANNUAL REPORT
OCTOBER 31, 2014
basis points tighter than current levels. This implies that we may have room for
further appreciation of the asset class in this low-rate environment and,
alternatively, provides a cushion against a future rise in rates, in our
opinion.
Stonebridge will continue to actively manage the Fund to seek to protect against
the downside risks in the market while seeking to outperform in all market
environments on a risk-adjusted basis. Based on our current outlook, we intend
to maintain a shorter duration in the Fund than the blended index to better
protect investors in a rising interest rate environment. In our opinion, the
current low-rate environment will be a positive for preferreds given the
attractive yield of the product. Nonetheless, given how quickly rates moved last
year, we believe maintaining a shorter duration than the Fund's blended index is
the best way to position a portfolio, especially if one does not have to
sacrifice yield on the portfolio.
Page 6
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
UNDERSTANDING YOUR FUND EXPENSES
OCTOBER 31, 2014 (UNAUDITED)
As a shareholder of the First Trust Preferred Securities and Income Fund, you
incur two types of costs: (1) transaction costs, including sales charges (loads)
on purchases of Class A Shares and contingent deferred sales charges on the
lesser of purchase price or redemption proceeds of Class C Shares; and (2)
ongoing costs, including management fees; distribution and/or service (12b-1)
fees; and other Fund expenses. This Example is intended to help you understand
your ongoing costs (in U.S. dollars) of investing in the Fund and to compare
these costs with the ongoing costs of investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended October 31, 2014.
ACTUAL EXPENSES
The first three columns of the table below provide information about actual
account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid over the period. Simply divide your account value by $1,000 (for
example, an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the third column under the heading entitled "Expenses
Paid During Period" to estimate the expenses you paid on your account during the
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The next three columns of the table below provide information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing cost of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or contingent deferred sales charges. Therefore, the
hypothetical section of the table is useful in comparing ongoing costs only, and
will not help you determine the relative total costs of owning different funds.
In addition, if these transactional costs were included, your costs would have
been higher.
--------------------------------------------------------------------------------------------------------
HYPOTHETICAL
ACTUAL EXPENSES (5% RETURN BEFORE EXPENSES)
--------------------------------------------- -------------------------------------------
BEGINNING ENDING EXPENSES PAID BEGINNING ENDING EXPENSES PAID
ACCOUNT ACCOUNT DURING PERIOD ACCOUNT ACCOUNT DURING PERIOD ANNUALIZED
VALUE VALUE 5/01/2014 - VALUE VALUE 5/01/2014 - EXPENSE
5/1/2014 10/31/2014 10/31/2014 (a) 5/01/2014 10/31/2014 10/31/2014 (a) RATIOS (b)
--------------------------------------------------------------------------------------------------------
Class A $ 1,000.00 $ 1,033.50 $ 7.18 $ 1,000.00 $ 1,018.15 $ 7.12 1.40%
Class C 1,000.00 1,030.10 11.00 1,000.00 1,014.37 10.92 2.15
Class F 1,000.00 1,034.20 6.67 1,000.00 1,018.65 6.61 1.30
Class I 1,000.00 1,035.20 5.90 1,000.00 1,019.41 5.85 1.15
Class R3 1,000.00 1,032.70 8.45 1,000.00 1,016.89 8.39 1.65
(a) Expenses are equal to the annualized expense ratios, multiplied by the
average account value over the period May 1, 2014 through October 31,
2014, multiplied by 184/365 (to reflect the six-month period).
(b) These expense ratios reflect expense caps.
Page 7
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2014
STATED STATED
SHARES DESCRIPTION RATE MATURITY VALUE
------------- ----------------------------------------------- ---------- ------------- --------------
$20 PAR PREFERRED SECURITIES - 0.2%
REAL ESTATE INVESTMENT TRUSTS - 0.2%
16,414 Equity Commonwealth............................ 7.50% 11/15/19 $ 328,444
--------------
TOTAL $20 PAR PREFERRED SECURITIES ......................................... 328,444
(Cost $335,421) --------------
$25 PAR PREFERRED SECURITIES - 34.6%
BANKS - 8.8%
90,000 Citigroup Capital XIII (a)..................... 7.88% 10/30/40 2,395,800
40,000 Citigroup, Inc., Series AA..................... 8.13% (b) 1,142,400
55,000 Citigroup, Inc., Series K (a).................. 6.88% (b) 1,471,800
39,608 Fifth Third Bancorp, Series I (a).............. 6.63% (b) 1,074,565
50,878 First Niagara Financial Group., Inc.,
Series B (a)................................ 8.63% (b) 1,419,496
7,752 ING Groep N.V.................................. 7.05% (b) 197,443
30,000 ING Groep N.V.................................. 7.20% (b) 768,000
27,400 ING Groep N.V.................................. 7.38% (b) 698,700
94,925 PNC Financial Services Group, Inc.,
Series P (a)................................ 6.13% (b) 2,585,757
8,513 Royal Bank of Scotland Group PLC, Series T..... 7.25% (b) 215,805
15,780 Zions Bancorporation, Series F................. 7.90% (b) 438,684
35,000 Zions Bancorporation, Series G (a)............. 6.30% (b) 913,500
--------------
13,321,950
--------------
CAPITAL MARKETS - 8.3%
16,696 Apollo Investment Corp......................... 6.88% 07/15/43 417,901
50,044 Ares Capital Corp.............................. 7.00% 02/15/22 1,272,619
107,230 Ares Capital Corp.............................. 7.75% 10/15/40 2,820,149
18,648 BGC Partners, Inc.............................. 8.13% 06/15/42 509,836
61,365 Deutsche Bank Capital Funding Trust IX......... 6.63% (b) 1,561,739
73,392 Morgan Stanley, Series E (a)................... 7.13% (b) 2,000,666
65,000 Prospect Capital Corp.......................... 6.95% 11/15/22 1,654,250
87,128 Stifel Financial Corp.......................... 6.70% 01/15/22 2,209,566
9,487 Stifel Financial Corp.......................... 5.38% 12/31/22 248,844
--------------
12,695,570
--------------
CONSUMER FINANCE - 0.2%
10,654 Capital One Financial Corp., Series C.......... 6.25% (b) 259,318
--------------
DIVERSIFIED FINANCIAL SERVICES - 1.1%
35,504 KKR Financial Holdings LLC..................... 8.38% 11/15/41 1,002,988
2,100 RBS Capital Funding Trust V, Series E.......... 5.90% (b) 50,190
26,198 RBS Capital Funding Trust VI, Series F......... 6.25% (b) 633,730
--------------
1,686,908
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 1.2%
70,000 Qwest Corp..................................... 7.50% 09/15/51 1,869,000
--------------
FOOD PRODUCTS - 3.3%
40,000 CHS, Inc. (a).................................. 6.75% (b) 1,007,200
26,300 CHS, Inc., Series 1............................ 7.88% (b) 748,761
123,006 CHS, Inc., Series 2 (a)........................ 7.10% (b) 3,303,941
--------------
5,059,902
--------------
Page 8 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
STATED STATED
SHARES DESCRIPTION RATE MATURITY VALUE
------------- ----------------------------------------------- ---------- ------------- --------------
$25 PAR PREFERRED SECURITIES (CONTINUED)
INSURANCE - 7.6%
94,957 Aegon N.V...................................... 6.38% (b) $ 2,424,252
60,000 Allstate Corp., Series E....................... 6.63% (b) 1,580,400
5,326 Arch Capital Group Ltd., Series C.............. 6.75% (b) 142,417
64,405 Aspen Insurance Holdings Ltd. (a).............. 5.95% (b) 1,666,157
77,306 Endurance Specialty Holdings Ltd., Series A.... 7.75% (b) 2,055,567
50,000 Endurance Specialty Holdings Ltd., Series B.... 7.50% (b) 1,333,500
63,311 Hartford Financial Services Group, Inc. (a).... 7.88% 04/15/42 1,917,057
18,846 MetLife, Inc., Series A (c).................... 4.00% (b) 451,362
--------------
11,570,712
--------------
MULTI-UTILITIES - 2.0%
121,818 SCANA Corp..................................... 7.70% 01/30/65 3,094,177
--------------
REAL ESTATE INVESTMENT TRUSTS - 1.7%
52,600 American Realty Capital Properties, Inc.,
Series F.................................... 6.70% (b) 1,158,252
55,701 DuPont Fabros Technology, Inc., Series A....... 7.88% (b) 1,425,946
--------------
2,584,198
--------------
WIRELESS TELECOMMUNICATION SERVICES - 0.4%
21,197 Telephone & Data Systems, Inc.................. 7.00% 03/15/60 540,524
--------------
TOTAL $25 PAR PREFERRED SECURITIES ......................................... 52,682,259
(Cost $52,572,095) --------------
$100 PAR PREFERRED SECURITIES - 6.5%
BANKS - 2.8%
30,000 CoBank ACB, Series F (a) (d)................... 6.25% (b) 3,135,939
11,600 CoBank ACB, Series G........................... 6.13% (b) 1,074,813
--------------
4,210,752
--------------
ELECTRIC UTILITIES - 1.7%
26,159 Southern California Edison Co., Series A (c)... 4.51% (b) 2,666,910
--------------
INSURANCE - 2.0%
30,000 Principal Financial Group, Inc., Series A (a).. 5.56% (b) 3,062,814
--------------
TOTAL $100 PAR PREFERRED SECURITIES ........................................ 9,940,476
(Cost $9,820,193) --------------
$1,000 PAR PREFERRED SECURITIES - 1.7%
BANKS - 1.3%
1,559 Farm Credit Bank of Texas, Series 1 (e)........ 10.00% (b) 2,019,392
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.4%
500 Centaur Funding Corp. (f)...................... 9.08% 04/21/20 630,000
--------------
TOTAL $1,000 PAR PREFERRED SECURITIES ...................................... 2,649,392
(Cost $2,530,140) --------------
See Notes to Financial Statements Page 9
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
PAR STATED STATED
AMOUNT DESCRIPTION RATE MATURITY VALUE
------------- ----------------------------------------------- ---------- ------------- --------------
CAPITAL PREFERRED SECURITIES - 54.3%
BANKS - 21.8%
$ 2,400,000 Banco Bilbao Vizcaya Argentaria S.A. (a)....... 9.00% (b) $ 2,599,920
2,000,000 Banco do Brasil S.A. (a) (d)................... 9.00% (b) 1,976,000
2,000,000 Bank of America Corp., Series M (a)............ 8.13% (b) 2,180,000
2,500,000 Bank of America Corp., Series Z (a)............ 6.50% (b) 2,575,000
2,050,000 Citigroup, Inc., Series N (a).................. 5.80% (b) 2,059,225
2,500,000 Credit Agricole S.A. (a) (d)................... 6.63% (b) 2,443,375
1,000,000 Dresdner Funding Trust I....................... 8.15% 06/30/31 1,173,750
2,500,000 Fuerstenberg Capital International Sarl & Cie
SECS (a).................................... 10.25% (b) 2,585,750
1,000,000 HSBC Capital Funding L.P. (a).................. 10.18% (b) 1,506,387
2,000,000 JPMorgan Chase & Co., Series S (a)............. 6.75% (b) 2,117,200
1,975,000 Lloyds Bank PLC (a) (d)........................ 12.00% (b) 2,878,562
1,000,000 M&T Capital Trust II (e)....................... 8.28% 06/01/27 1,018,204
2,000,000 National Australia Bank Ltd/New York (a)....... 8.00% (b) 2,181,150
1,298,000 Natixis (a).................................... 10.00% (b) 1,533,263
2,145,000 NIBC Bank N.V.................................. 7.63% (b) 2,155,725
2,000,000 Zions Bancorporation, Series J (a)............. 7.20% (b) 2,121,328
--------------
33,104,839
--------------
CAPITAL MARKETS - 2.8%
2,000,000 Credit Suisse Group Guernsey I Ltd. (a)........ 7.88% 02/24/41 2,138,750
1,041,000 Deutsche Bank Capital Trust IV (a) (e)......... 4.59% (b) 1,014,975
1,500,000 Goldman Sachs Capital III (c).................. 4.00% (b) 1,133,250
--------------
4,286,975
--------------
DIVERSIFIED FINANCIAL SERVICES - 3.9%
1,500,000 Banco Btg Pactual SA/Luxembourg (a) (d)........ 8.75% (b) 1,560,750
1,550,000 General Electric Capital Corp., Series A (a)... 7.13% (b) 1,811,562
2,500,000 Macquarie PMI LLC.............................. 8.38% (b) 2,618,750
--------------
5,991,062
--------------
ELECTRIC UTILITIES - 3.8%
3,000,000 Enel SpA (a) (d)............................... 8.75% 09/24/73 3,517,500
2,000,000 Southern California Edison Co., Series E (a)... 6.25% (b) 2,201,668
--------------
5,719,168
--------------
FOOD PRODUCTS - 2.1%
3,000,000 Land O'Lakes Capital Trust I (d)............... 7.45% 03/15/28 3,150,000
--------------
INSURANCE - 18.5%
1,000,000 American International Group, Inc. (a)......... 8.18% 05/15/58 1,362,500
4,200,000 Aquarius + Investments PLC for Swiss
Reinsurance Co., Ltd. (a)................... 8.25% (b) 4,646,250
2,215,000 Assured Guaranty Municipal Holdings,
Inc. (a) (d)................................ 6.40% 12/15/66 1,949,200
1,500,000 Assured Guaranty US Holdings,
Series A (a)................................ 6.40% 12/15/66 1,410,000
1,500,000 Aviva PLC...................................... 8.25% (b) 1,687,463
1,000,000 Catlin Insurance Co., Ltd. (a)................. 7.25% (b) 1,030,000
2,500,000 CNP Assurances (a)............................. 7.50% (b) 2,759,375
2,066,000 Dai-ichi Life Insurance Co Ltd.
(The) (a) (d)............................... 7.25% (b) 2,420,507
1,500,000 Friends Life Holdings PLC (a).................. 7.88% (b) 1,660,659
Page 10 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
PAR STATED STATED
AMOUNT DESCRIPTION RATE MATURITY VALUE
------------- ----------------------------------------------- ---------- ------------- --------------
CAPITAL PREFERRED SECURITIES (CONTINUED)
INSURANCE (CONTINUED)
$ 3,285,000 Liberty Mutual Group, Inc. (a)................. 10.75% 06/15/58 $ 5,042,475
2,000,000 Prudential PLC (a)............................. 11.75% (b) 2,034,400
2,000,000 QBE Capital Funding III Ltd. (a) (d)........... 7.25% 05/24/41 2,170,000
--------------
28,172,829
--------------
MULTI-UTILITIES - 1.4%
2,000,000 RWE AG (a)..................................... 7.00% 10/12/72 2,175,200
--------------
TOTAL CAPITAL PREFERRED SECURITIES ......................................... 82,600,073
(Cost $82,208,138) --------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ----------------------------------------------- ---------- ------------- --------------
CORPORATE BONDS AND NOTES - 1.0%
INSURANCE - 1.0%
1,400,000 Wilton Re Finance LLC (a) (f).................. 5.88% 03/30/33 1,463,000
--------------
TOTAL CORPORATE BONDS AND NOTES ............................................ 1,463,000
(Cost $1,400,000) --------------
TOTAL INVESTMENTS - 98.3% .................................................. 149,663,644
(Cost $148,865,987) (g)
NET OTHER ASSETS AND LIABILITIES - 1.7% .................................... 2,569,960
--------------
NET ASSETS - 100.0% ........................................................ $ 152,233,604
==============
(a) Fixed-to-floating or fixed-to-variable rate security. The interest rate
shown reflects the fixed rate in effect at October 31, 2014. At a
predetermined date, the fixed rate will change to a floating rate or a
variable rate.
(b) Perpetual maturity.
(c) Floating rate security. The interest rate shown reflects the rate in
effect at October 31, 2014.
(d) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the Securities
Act of 1933, as amended (the "1933 Act"), and may be resold in
transactions exempt from registration, normally to qualified institutional
buyers. Pursuant to procedures adopted by the First Trust Series Fund's
(the "Trust") Board of Trustees, this security has been determined to be
liquid by Stonebridge Advisors LLC, the Fund's sub-advisor (the
"Sub-Advisor"). Although market instability can result in periods of
increased overall market illiquidity, liquidity for each security is
determined based on security specific factors and assumptions, which
require subjective judgment. At October 31, 2014, securities noted as such
amounted to $25,201,833 or 16.55% of net assets.
(e) Pursuant to procedures adopted by the Trust's Board of Trustees, this
security has been determined to be illiquid by the Sub-Advisor.
(f) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the 1933 Act,
and may be resold in transactions exempt from registration, normally to
qualified institutional buyers (see Note 2C - Restricted Securities in the
Notes to Financial Statements).
(g) Aggregate cost for federal income tax purposes is $148,960,749. As of
October 31, 2014, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$1,811,243 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$1,108,348.
See Notes to Financial Statements Page 11
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of October 31,
2014 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
INVESTMENTS 10/31/2014 PRICES INPUTS INPUTS
--------------------------------------------------- ------------- ------------- ------------- -------------
$20 Par Preferred Securities*...................... $ 328,444 $ 328,444 $ -- $ --
$25 Par Preferred Securities*...................... 52,682,259 52,682,259 -- --
$100 Par Preferred Securities*..................... 9,940,476 -- 9,940,476 --
$1,000 Par Preferred Securities*................... 2,649,392 -- 2,649,392 --
Capital Preferred Securities*...................... 82,600,073 -- 82,600,073 --
Corporate Bonds and Notes*......................... 1,463,000 -- 1,463,000 --
------------- ------------- ------------- -------------
Total Investments.................................. $ 149,663,644 $ 53,010,703 $ 96,652,941 $ --
============= ============= ============= =============
* See the Portfolio of Investments for industry breakout.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. As of October
31, 2014, the Fund transferred $100 par preferred securities valued at
$5,729,724 from Level 1 to Level 2 of the fair value hierarchy due to the use of
observable market inputs not in an active market.
Page 12 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2014
ASSETS:
Investments, at value
(Cost $148,865,987)......................................................................... $149,663,644
Cash........................................................................................ 2,688,710
Receivables:
Investment securities sold.................................................................. 1,552,844
Interest.................................................................................... 1,441,614
Fund shares sold............................................................................ 341,532
Dividends................................................................................... 133,066
Prepaid expenses............................................................................... 22,405
------------
Total Assets................................................................................ 155,843,815
------------
LIABILITIES:
Payables:
Investment securities purchased............................................................. 2,348,221
Fund shares repurchased..................................................................... 913,261
Distributions payable....................................................................... 89,498
Investment advisory fees.................................................................... 65,322
12b-1 distribution and service fees......................................................... 46,139
Audit and tax fees.......................................................................... 33,202
Printing fees............................................................................... 29,437
Administrative fees......................................................................... 29,029
Transfer agent fees......................................................................... 26,488
Custodian fees.............................................................................. 14,095
Legal fees.................................................................................. 10,285
Commitment fees............................................................................. 2,576
Trustees' fees and expenses................................................................. 1,532
Financial reporting fees.................................................................... 771
Other liabilities.............................................................................. 355
------------
Total Liabilities........................................................................... 3,610,211
------------
NET ASSETS..................................................................................... $152,233,604
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $162,707,148
Par value ($0.01 per share with an unlimited number of shares authorized)...................... 71,639
Accumulated net investment income (loss)....................................................... 36,688
Accumulated net realized gain (loss) on investments, written options and futures............... (11,379,528)
Net unrealized appreciation (depreciation) on investments...................................... 797,657
------------
NET ASSETS..................................................................................... $152,233,604
============
MAXIMUM OFFERING PRICE PER SHARE:
CLASS A SHARES:
Net asset value and redemption price per share (Based on net assets of $32,873,913 and
1,550,455 shares of beneficial interest issued and outstanding)........................... $ 21.20
Maximum sales charge (4.50% of offering price).............................................. 1.00
------------
Maximum offering price to public............................................................ $ 22.20
============
CLASS C SHARES:
Net asset value and redemption price per share (Based on net assets of $45,247,525 and
2,130,202 shares of beneficial interest issued and outstanding)........................... $ 21.24
============
CLASS F SHARES:
Net asset value and redemption price per share (Based on net assets of $2,617,251 and
122,487 shares of beneficial interest issued and outstanding)............................. $ 21.37
============
CLASS I SHARES:
Net asset value and redemption price per share (Based on net assets of $71,093,731 and
3,341,854 shares of beneficial interest issued and outstanding)........................... $ 21.27
============
CLASS R3 SHARES:
Net asset value and redemption price per share (Based on net assets of $401,184 and
18,923 shares of beneficial interest issued and outstanding).............................. $ 21.20
============
See Notes to Financial Statements Page 13
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2014
INVESTMENT INCOME
Dividends...................................................................................... $ 6,714,283
Interest (net of foreign withholding tax of $5,344)............................................ 4,890,667
Other.......................................................................................... 20,000
------------
Total investment income..................................................................... 11,624,950
------------
EXPENSES:
Investment advisory fees....................................................................... 1,350,378
12b-1 distribution and/or service fees:........................................................
Class A..................................................................................... 162,050
Class C..................................................................................... 485,193
Class F..................................................................................... 5,419
Class R3.................................................................................... 2,317
Transfer agent fees............................................................................ 199,599
Registration fees.............................................................................. 92,300
Printing fees.................................................................................. 70,443
Administrative fees............................................................................ 69,622
Legal fees..................................................................................... 58,685
Custodian fees................................................................................. 34,882
Audit and tax fees............................................................................. 34,114
Commitment fees................................................................................ 23,585
Trustees' fees and expenses.................................................................... 18,821
Expenses previously waived or reimbursed....................................................... 11,670
Financial reporting fees....................................................................... 9,250
Listing expense................................................................................ 2,500
Other.......................................................................................... 16,091
------------
Total expenses.............................................................................. 2,646,919
------------
Fees waived or expenses reimbursed by the investment advisor................................ (50,893)
------------
Net expenses................................................................................... 2,596,026
------------
NET INVESTMENT INCOME (LOSS)................................................................... 9,028,924
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments................................................................................. (3,356,549)
Written options............................................................................. 20,710
Futures..................................................................................... (810,604)
------------
Net realized gain (loss)....................................................................... (4,146,443)
------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................................. 11,249,199
Futures..................................................................................... 142,734
------------
Net change in unrealized appreciation (depreciation)........................................... 11,391,933
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ 7,245,490
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 16,274,414
============
Page 14 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
10/31/2014 10/31/2013
------------- -------------
OPERATIONS:
Net investment income (loss)................................................ $ 9,028,924 $ 10,165,390
Net realized gain (loss).................................................... (4,146,443) (7,457,130)
Net change in unrealized appreciation (depreciation)........................ 11,391,933 (16,197,323)
------------- -------------
Net increase (decrease) in net assets resulting from operations............. 16,274,414 (13,489,063)
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A Shares.............................................................. (3,416,968) (4,719,784)
Class C Shares.............................................................. (2,190,987) (2,049,350)
Class F Shares.............................................................. (191,443) (257,903)
Class I Shares.............................................................. (2,812,589) (3,011,903)
Class R3 Shares............................................................. (23,181) (24,335)
------------- -------------
(8,635,168) (10,063,275)
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET REALIZED GAIN:
Class A Shares.............................................................. -- (417,247)
Class C Shares.............................................................. -- (185,466)
Class F Shares.............................................................. -- (20,286)
Class I Shares.............................................................. -- (252,725)
Class R3 Shares............................................................. -- (2,675)
------------- -------------
-- (878,399)
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM RETURN OF CAPITAL:
Class A Shares.............................................................. (82,755) (719,240)
Class C Shares.............................................................. (53,063) (312,416)
Class F Shares.............................................................. (4,636) (39,232)
Class I Shares.............................................................. (68,117) (458,602)
Class R3 Shares............................................................. (562) (3,723)
------------- -------------
(209,133) (1,533,213)
------------- -------------
Total distributions to shareholders......................................... (8,844,301) (12,474,887)
------------- -------------
CAPITAL TRANSACTIONS:
Proceeds from shares sold .................................................. 59,865,570 187,595,072
Proceeds from shares reinvested............................................. 7,470,411 8,671,431
Cost of shares redeemed..................................................... (131,107,450) (132,184,442)
------------- -------------
Net increase (decrease) in net assets resulting from capital transactions... (63,771,469) 64,082,061
------------- -------------
Total increase (decrease) in net assets..................................... (56,341,356) 38,118,111
NET ASSETS:
Beginning of period......................................................... 208,574,960 170,456,849
------------- -------------
End of period............................................................... $ 152,233,604 $ 208,574,960
============= =============
Accumulated net investment income (loss) at end of period................... $ 36,688 $ (84,419)
============= =============
See Notes to Financial Statements Page 15
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
CLASS A SHARES 10/31/2014 10/31/2013 10/31/2012 10/31/2011 (a)
------------ ------------ ------------ --------------
Net asset value, beginning of period ........... $ 20.27 $ 22.42 $ 20.10 $ 20.26
---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ................... 1.14 (b) 0.98 (b) 0.89 (b) 0.79
Net realized and unrealized gain (loss) ........ 0.91 (1.91) 2.55 (0.11)
---------- ---------- ---------- ----------
Total from investment operations ............... 2.05 (0.93) 3.44 0.68
---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income .......................... (1.09) (0.98) (1.12) (0.84)
Net realized gain............................... -- (0.09) (0.00) (c) --
Return of capital............................... (0.03) (0.15) -- --
---------- ---------- ---------- ----------
Total distributions............................. (1.12) (1.22) (1.12) (0.84)
---------- ---------- ---------- ----------
Net asset value, end of period ................. $ 21.20 $ 20.27 $ 22.42 $ 20.10
========== ========== ========== ==========
TOTAL RETURN (d)................................ 10.35% (4.36)% 17.60% 3.45%
========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........... $ 32,874 $ 90,286 $ 83,717 $ 6,932
Ratio of total expenses to average net assets... 1.40% 1.44% 1.83% 6.68% (e)
Ratio of net expenses to average net assets .... 1.40% 1.40% 1.40% 1.40% (e)
Ratio of net investment income (loss) to average
net assets ................................ 5.47% 4.52% 4.13% 4.68% (e)
Portfolio turnover rate......................... 170% 60% 60% 88%
(a) Class A Shares commenced operations on February 25, 2011.
(b) Based on average shares outstanding.
(c) Amount is less than $0.01.
(d) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge of 4.50% or contingent
deferred sales charge (CDSC). On purchases of $1 million or more, a CDSC
of 1% may be imposed on certain redemptions made within twelve months of
purchase. If the sales charges were included, total returns would be
lower. These returns include Rule 12b-1 service fees of 0.25% and do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total returns would
have been lower if certain fees had not been waived and expenses
reimbursed by the investment advisor. Total return is calculated for the
time period presented and is not annualized for periods less than one
year.
(e) Annualized.
Page 16 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
CLASS C SHARES 10/31/2014 10/31/2013 10/31/2012 10/31/2011 (a)
------------ ------------ ------------ --------------
Net asset value, beginning of period ........... $ 20.30 $ 22.45 $ 20.13 $ 20.26
---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ................... 0.99 (b) 0.83 (b) 0.73 (b) 0.69
Net realized and unrealized gain (loss) ........ 0.91 (1.93) 2.55 (0.08)
---------- ---------- ---------- ----------
Total from investment operations ............... 1.90 (1.10) 3.28 0.61
---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income .......................... (0.94) (0.84) (0.96) (0.74)
Net realized gain............................... -- (0.08) (0.00) (c) --
Return of capital............................... (0.02) (0.13) -- --
---------- ---------- ---------- ----------
Total distributions............................. (0.96) (1.05) (0.96) (0.74)
---------- ---------- ---------- ----------
Net asset value, end of period.................. $ 21.24 $ 20.30 $ 22.45 $ 20.13
========== ========== ========== ==========
TOTAL RETURN (d)................................ 9.56% (5.03)% 16.70% 3.08%
========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........... $ 45,248 $ 55,376 $ 36,681 $ 2,720
Ratio of total expenses to average net assets... 2.18% 2.17% 2.66% 8.03% (e)
Ratio of net expenses to average net assets .... 2.15% 2.15% 2.15% 2.15% (e)
Ratio of net investment income (loss) to average
net assets................................. 4.75% 3.81% 3.36% 4.10% (e)
Portfolio turnover rate ........................ 170% 60% 60% 88%
(a) Class C Shares commenced operations on February 25, 2011.
(b) Based on average shares outstanding.
(c) Amount is less than $0.01.
(d) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 1%, charged on certain redemptions
made within one year of purchase. If the sales charge was included, total
return would be lower. These returns include combined Rule 12b-1
distribution and service fees of 1% and do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption
of Fund shares. The total returns would have been lower if certain fees
had not been waived and expenses reimbursed by the investment advisor.
Total return is calculated for the time period presented and is not
annualized for periods less than one year.
(e) Annualized.
See Notes to Financial Statements Page 17
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
CLASS F SHARES 10/31/2014 10/31/2013 10/31/2012 10/31/2011 (a)
------------ ------------ ------------ --------------
Net asset value, beginning of period ........... $ 20.42 $ 22.59 $ 20.12 $ 20.25
---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ................... 1.18 (b) 1.02 (b) 0.89 (b) 0.70
Net realized and unrealized gain (loss) ........ 0.91 (1.95) 2.72 (0.07)
---------- ---------- ---------- ----------
Total from investment operations ............... 2.09 (0.93) 3.61 0.63
---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income .......................... (1.11) (1.01) (1.14) (0.76)
Net realized gain............................... -- (0.08) (0.00) (c) --
Return of capital............................... (0.03) (0.15) -- --
---------- ---------- ---------- ----------
Total distributions............................. (1.14) (1.24) (1.14) (0.76)
---------- ---------- ---------- ----------
Net asset value, end of period.................. $ 21.37 $ 20.42 $ 22.59 $ 20.12
========== ========== ========== ==========
TOTAL RETURN (d)................................ 10.48% (4.32)% 18.47% 3.17%
========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........... $ 2,617 $ 3,735 $ 4,012 $ 1
Ratio of total expenses to average net assets... 1.81% 1.58% 3.71% 233.60% (e)
Ratio of net expenses to average net assets .... 1.30% 1.30% 1.30% 1.30% (e)
Ratio of net investment income (loss) to average
net assets................................. 5.64% 4.63% 4.09% 5.21% (e)
Portfolio turnover rate......................... 170% 60% 60% 88%
(a) Class F Shares were initially seeded and commenced operations on March 2,
2011.
(b) Based on average shares outstanding.
(c) Amount is less than $0.01.
(d) Assumes reinvestment of all distributions for the period. These returns
include Rule 12b-1 service fees of 0.15% and do not reflect the deduction
of taxes that a shareholder would pay on Fund distributions or the
redemption of Fund shares. The total returns would have been lower if
certain fees had not been waived and expenses reimbursed by the investment
advisor. Total return is calculated for the time period presented and is
not annualized for periods less than one year.
(e) Annualized.
Page 18 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
CLASS I SHARES 10/31/2014 10/31/2013 10/31/2012 10/31/2011 (a)
------------ ------------ ------------ --------------
Net asset value, beginning of period ........... $ 20.33 $ 22.47 $ 20.15 $ 20.00
---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ................... 1.20 (b) 1.04 (b) 0.92 (b) 0.82
Net realized and unrealized gain (loss) ........ 0.91 (1.91) 2.57 0.21
---------- ---------- ---------- ----------
Total from investment operations ............... 2.11 (0.87) 3.49 1.03
---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income .......................... (1.14) (1.03) (1.17) (0.88)
Net realized gain............................... -- (0.09) (0.00) (c) --
Return of capital............................... (0.03) (0.15) -- --
---------- ---------- ---------- ----------
Total distributions............................. (1.17) (1.27) (1.17) (0.88)
---------- ---------- ---------- ----------
Net asset value, end of period.................. $ 21.27 $ 20.33 $ 22.47 $ 20.15
========== ========== ========== ==========
TOTAL RETURN (d)................................ 10.65% (4.06)% 17.84% 5.21%
========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........... $ 71,094 $ 58,700 $ 45,432 $ 439
Ratio of total expenses to average net assets... 1.15% 1.23% 1.46% 22.09% (e)
Ratio of net expenses to average net assets .... 1.15% 1.15% 1.15% 1.15% (e)
Ratio of net investment income (loss) to average
net assets................................. 5.74% 4.79% 4.20% 5.12% (e)
Portfolio turnover rate......................... 170% 60% 60% 88%
(a) Class I Shares were initially seeded on December 16, 2010 and commenced
operations on January 11, 2011.
(b) Based on average shares outstanding.
(c) Amount is less than $0.01.
(d) Assumes reinvestment of all distributions for the period. These returns do
not reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total returns would
have been lower if certain fees had not been waived and expenses
reimbursed by the investment advisor. Total return is calculated for the
time period presented and is not annualized for periods less than one
year.
(e) Annualized.
See Notes to Financial Statements Page 19
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
CLASS R3 SHARES 10/31/2014 10/31/2013 10/31/2012 10/31/2011 (a)
------------ ------------ ------------ --------------
Net asset value, beginning of period . $ 20.26 $ 22.41 $ 20.11 $ 20.25
---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss).......... 1.09 (b) 0.93 (b) 0.80 (b) 0.61
Net realized and unrealized gain (loss) 0.92 (1.92) 2.56 (0.07)
---------- ---------- ---------- ----------
Total from investment operations ..... 2.01 (0.99) 3.36 0.54
---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income ................ (1.04) (0.92) (1.06) (0.68)
Net realized gain..................... -- (0.10) (0.00) (c) --
Return of capital..................... (0.03) (0.14) -- --
---------- ---------- ---------- ----------
Total distributions................... (1.07) (1.16) (1.06) (0.68)
---------- ---------- ---------- ----------
Net asset value, end of period........ $ 21.20 $ 20.26 $ 22.41 $ 20.11
========== ========== ========== ==========
TOTAL RETURN (d)...................... 10.14% (4.61)% 17.19% 2.74%
========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) . $ 401 $ 478 $ 615 $ 1
Ratio of total expenses to average net assets 5.74% 4.87% 11.51% 301.79% (e)
Ratio of net expenses to average net assets 1.65% 1.65% 1.65% 1.90% (e)
Ratio of net investment income (loss) to average
net assets....................... 5.25% 4.25% 3.66% 4.62% (e)
Portfolio turnover rate .............. 170% 60% 60% 88%
(a) Class R3 Shares were initially seeded and commenced operations on March 2,
2011.
(b) Based on average shares outstanding.
(c) Amount is less than $0.01.
(d) Assumes reinvestment of all distributions for the period. These returns
include combined Rule 12b-1 distribution and service fees of 0.50%
effective December 15, 2011, and 0.75% prior to December 15, 2011, and do
not reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total returns would
have been lower if certain fees had not been waived and expenses
reimbursed by the investment advisor. Total return is calculated for the
time period presented and is not annualized for periods less than one
year.
(e) Annualized.
Page 20 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2014
1. ORGANIZATION
First Trust Preferred Securities and Income Fund (the "Fund") is a series of
First Trust Series Fund (the "Trust"), a Massachusetts business trust organized
on July 9, 2010, and is registered as a non-diversified, open-end management
investment company with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund offers
five classes of shares: Class A, Class C, Class F, Class I and Class R3. Each
class represents an interest in the same portfolio of investments but with a
different combination of sales charges, distribution and service (12b-1) fees,
eligibility requirements and other features.
The Fund's investment objective is to seek to provide current income and total
return. The Fund seeks to achieve its objective by investing, under normal
market conditions, at least 80% of its net assets (including investment
borrowings, if any) in preferred securities and other securities with similar
economic characteristics. There can be no assurance that the Fund will achieve
its investment objective. The Fund may not be appropriate for all investors.
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 ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") for each class of shares of the Fund is determined
daily as of the close of trading on the New York Stock Exchange ("NYSE"),
normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. If
the NYSE closes early on a valuation day, the NAV is determined as of that time.
Domestic debt securities and foreign securities are priced using data reflecting
the earlier closing at the principal markets for those securities. The NAV for
each class is calculated by dividing the value of the Fund's total assets
attributable to such class (including accrued interest and dividends), less all
liabilities attributable to such class (including accrued expenses, dividends
declared but unpaid and any borrowings of the Fund), by the total number of
shares of the class outstanding. Differences in NAV of each class of the Fund's
shares are generally expected to be due to the daily expense accruals of the
specified distribution and service (12b-1) fees and transfer agency costs
applicable to such class of shares and the resulting differential in the
dividends that may be paid on each class of shares.
The Fund's investments are valued daily at market value or, in absence of market
value with respect to any portfolio securities, at fair value. Market value
prices represent last sale or official closing prices from a national or foreign
exchange (i.e. a regulated market) and are primarily obtained from third party
pricing services. Fair value prices represent any prices not considered market
value prices and are either obtained from a third party pricing service, or are
determined by the Pricing Committee of the Trust's investment advisor, First
Trust Advisors L.P. ("First Trust" or the "Advisor") in accordance with
valuation procedures adopted by the Trust's Board of Trustees, and in accordance
with provisions of the 1940 Act. Investments valued by the Advisor's Pricing
Committee, if any, are footnoted as such in the footnotes to the Portfolio of
Investments. The Fund's investments are valued as follows:
Preferred stocks and other equity securities listed on any national or
foreign exchange (excluding the NASDAQ(R) Stock Market LLC ("NASDAQ") and
the London Stock Exchange Alternative Investment Market ("AIM")), are
valued at the last sale price on the exchange on which they are
principally traded or, for NASDAQ and AIM securities, the official closing
price. Securities traded on more than one securities exchange are valued
at the last sale price or official closing price, as applicable, at the
close of the securities exchange representing the principal market for
such securities.
Bonds, notes and other debt securities are fair valued on the basis of
valuations provided by dealers who make markets in such securities or by
an independent pricing service approved by the Trust's Board of Trustees,
which may use the following valuation inputs when available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Page 21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2014
Exchange-traded options and futures contracts are valued at the closing price
in the market where such contracts are principally traded. If no closing
price is available, exchange-traded options and futures contracts are fair
valued at the mean of their most recent bid and asked price, if available,
and otherwise at their closing bid price. Over-the-counter options contracts
are fair valued at the mean of their most recent bid and asked price, if
available, and otherwise at their closing bid price.
Fixed income and other debt securities having a remaining maturity of 60 days
or less when purchased are fair valued at cost adjusted for amortization of
premiums and accretion of discounts (amortized cost), provided the Advisor's
Pricing Committee has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer specific
conditions existing at the time of the determination. Factors that may be
considered in determining the appropriateness of the use of amortized cost
include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes
thereto;
2) the liquidity conditions in the relevant market and changes
thereto;
3) the interest rate conditions in the relevant market and
changes thereto (such as significant changes in interest
rates);
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing
Committee may use last-obtained market-based data to assist it
when valuing portfolio securities using amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Trust's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose
market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's fair value. As a general
principle, the current fair value of a security would appear to be the amount
which the owner might reasonably expect to receive for the security upon its
current sale. When fair value prices are used, generally they will differ from
market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might affect
the value of the security.
If the securities in question are foreign securities, the following additional
information may be considered:
1) the value of similar foreign securities traded on other foreign
markets;
2) ADR trading of similar securities;
3) closed-end fund trading of similar securities;
4) foreign currency exchange activity;
5) the trading prices of financial products that are tied to baskets of
foreign securities;
6) factors relating to the event that precipitated the pricing problem;
7) whether the event is likely to recur; and
8) whether the effects of the event are isolated or whether they affect
entire markets, countries or regions.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
Page 22
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2014
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodology used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of October 31, 2014, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
daily on the accrual basis, including the amortization of premiums and accretion
of discounts. Income is allocated on a pro rata basis to each class of shares.
The Fund may hold the securities of real estate investment trusts ("REITs").
Distributions from such investments may include income, capital gains and return
of capital. The actual character of amounts received during the year is not
known until after the REITs' fiscal year end. The Fund records the character of
distributions received from the REITs during the year based on estimates
available. The characterization of distributions received by the Fund may be
subsequently revised based on information received from the REITs after their
tax reporting periods conclude.
C. RESTRICTED SECURITIES:
The Fund invests in restricted securities, which are securities that may not be
offered for public sale without first being registered under the 1933 Act. Prior
to registration, restricted securities may only be resold in transactions exempt
from registration under Rule 144A under the 1933 Act, normally to qualified
institutional buyers. As of October 31, 2014, the Fund held restricted
securities as shown in the following table that Stonebridge Advisors LLC
("Stonebridge" or the "Sub-Advisor") has deemed illiquid pursuant to procedures
adopted by the Trust's Board of Trustees. Although market instability can result
in periods of increased overall market illiquidity, liquidity for each security
is determined based on security-specific factors and assumptions, which require
subjective judgment. The Fund does not have the right to demand that such
securities be registered. These securities are valued according to the valuation
procedures as stated in the Portfolio Valuation note (Note 2A) and are not
expressed as a discount to the carrying value of a comparable unrestricted
security. There are no unrestricted securities with the same maturity date and
yield for these issuers.
SHARES/
ACQUISITION PRINCIPAL CARRYING % OF
SECURITY DATE VALUE PRICE COST VALUE NET ASSETS
-----------------------------------------------------------------------------------------------------------------------
Centaur Funding Corp., 9.08%, 4/21/20 7/17/14 500 $ 1,260.00 $ 624,750 $ 630,000 0.41%
Wilton Re Finance LLC, 5.08%, 3/30/33 3/25/13 $ 1,400,000 1.045 1,400,000 1,463,000 0.96
--------------------------------------
$ 2,024,750 $ 2,093,000 1.37%
--------------------------------------
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
The Fund will declare daily and pay monthly distributions of all or a portion of
its net income to holders of each class of shares. Distributions of any net
capital gains earned by the Fund will be distributed at least annually.
Distributions will automatically be reinvested into additional Fund shares
unless cash distributions are elected by the shareholder.
Distributions from net investment income and realized capital gains are
determined in accordance with income tax regulations, which may differ from U.S.
GAAP. Certain capital accounts in the financial statements are periodically
adjusted for permanent differences in order to reflect their tax character.
These permanent differences are primarily due to the varying treatment of income
and gain/loss on portfolio securities held by the Fund and have no impact on net
assets or NAV per share. Temporary differences, which arise from recognizing
certain items of income, expense and gain/loss in different periods for
financial statement and tax purposes, will reverse at some time in the future.
Permanent differences incurred during the year ended October 31, 2014, resulting
in book and tax accounting differences, have been reclassified at year end to
reflect a decrease in accumulated net investment income (loss) of $272,649, an
increase in accumulated net realized gain (loss) on investments of $267,379 and
an increase to paid-in capital of $5,270. Net assets were not affected by these
reclassifications.
Page 23
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2014
The tax character of distributions paid during the fiscal years ended October
31, 2014 and 2013 was as follows:
Distributions paid from: 2014 2013
Ordinary income............................... $ 8,635,168 $ 10,838,420
Capital gain.................................. -- 103,254
Return of capital............................. 209,133 1,533,213
As of October 31, 2014, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income................. $ --
Undistributed capital gains................... --
------------
Total undistributed earnings.................. --
Accumulated capital and other losses.......... (11,248,078)
Net unrealized appreciation (depreciation).... 702,895
------------
Total accumulated earnings (losses)........... (10,545,183)
Other......................................... --
Paid-in capital............................... 162,778,787
------------
Net assets.................................... $152,233,604
============
E. 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. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At October 31, 2014, for
federal income tax purposes, the Fund had a capital loss carryforward of
$11,248,078 available, to the extent provided by regulations, to offset future
capital gains.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ended 2011, 2012,
2013 and 2014 remain open to federal and state audit. As of October 31, 2014,
management has evaluated the application of these standards to the Fund, and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
F. EXPENSES:
The Fund pays all expenses directly related to its operations. Expenses of the
Fund are allocated on a pro rata basis to each class of shares, except for
distribution and service (12b-1) fees and incremental transfer agency costs
which are unique to each class of shares.
G. FUTURES CONTRACTS:
The Fund purchases or sells (i.e., is long or short) futures contracts to hedge
against changes in interest rates (interest rate risk). Futures contracts are
agreements between the Fund and a counterparty to buy or sell a specific
quantity of an underlying instrument at a specified price and at a specified
date. Depending on the terms of the contract, futures contracts are settled
either through physical delivery of the underlying instrument on the settlement
date or by payment of a cash settlement amount on the settlement date. Open
futures contracts can also be closed out prior to settlement by entering into an
offsetting transaction in a matching futures contract. If the Fund is not able
to enter into an offsetting transaction, the Fund will continue to be required
to maintain margin deposits on the futures contract. When the contract is closed
or expires, the Fund records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value at the
time it was closed or expired. This gain or loss is included in "Net realized
gain (loss) on futures" on the Statement of Operations.
Upon entering into a futures contract, the Fund must deposit funds, called
margin, with its custodian in the name of the clearing broker equal to a
specified percentage of the current value of the contract. Open futures contacts
are marked to market daily with the change in value recognized as a component of
"Net change in unrealized appreciation (depreciation) on futures" on the
Statement of Operations. This daily fluctuation in value of the contract is also
known as variation margin and is included in "Variation margin payable or
receivable" on the Statement of Assets and Liabilities.
Page 24
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2014
If market conditions change unexpectedly, the Fund may not achieve the
anticipated benefits of the futures contract and may realize a loss. The use of
futures contracts involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged
instruments.
As of October 31, 2014, there were no futures contracts outstanding.
H. OPTION CONTRACTS:
The Fund may purchase or write put and call options on futures contracts and
enter into closing transactions with respect to such options to terminate an
existing position. A futures option gives the holder the right, in return for
the premium paid, to assume a long position (call) or short position (put) in a
futures contract at a specified exercise price prior to the expiration of the
option. Upon exercise of a call option, the holder acquires a long position in
the futures contract and the writer is assigned the opposite short position. In
the case of a put option, the opposite is true. If the Fund writes (sells) an
option, an amount equal to the premium received by the Fund is presented as
"Options written, at value" on the Statement of Assets and Liabilities. Prior to
exercise or expiration, a futures option may be closed out by an offsetting
purchase or sale of a futures option of the same series.
The Fund may use options on futures contracts in connection with hedging
strategies. Generally, these strategies would be applied under the same market
and market sector conditions in which the Fund uses put and call options on
securities or indices. The purchase of put options on futures contracts is
analogous to the purchase of puts on securities or indices so as to hedge the
Fund's securities holdings against the risk of declining market prices. The
writing of a call option or the purchasing of a put option on a futures contract
constitutes a partial hedge against declining prices of securities which are
deliverable upon exercise of the futures contract. If the price at expiration of
a written call option is below the exercise price, the Fund will retain the full
amount of the option premium, which provides a partial hedge against any decline
that may have occurred in the Fund's holdings of securities. If the price when
the option is exercised is above the exercise price, however, the Fund will
incur a loss, which may be offset, in whole or in part, by the increase in the
value of the securities held by the Fund that were being hedged. Gain or loss on
options is presented as "Net realized gain (loss) on written options" on the
Statement of Operations. Writing a put option or purchasing a call option on a
futures contract serves as a partial hedge against an increase in the value of
the securities the Fund intends to acquire.
As with investments in futures contracts, the Fund is required to deposit and
maintain margin with respect to put and call options on futures contracts
written by them. Such margin deposits will vary depending on the nature of the
underlying futures contract (and the related initial margin requirements), the
current market value of the option, and other futures positions held by the
Fund. The Fund will earmark or set aside in a segregated account at such Fund's
custodian, liquid assets, such as cash, U.S. government securities or other
high-grade liquid debt obligations equal in value to the amount due on the
underlying obligation. Such segregated assets will be marked-to-market daily,
and additional assets will be earmarked or placed in the segregated account
whenever the total value of the earmarked or segregated assets falls below the
amount due on the underlying obligation.
The risks associated with the use of options on futures contracts include the
risk that the Fund may close out its position as a writer of an option only if a
liquid secondary market exists for such options, which cannot be assured. The
Fund's successful use of options on futures contracts depends on the
Sub-Advisor's ability to correctly predict the movement in prices of futures
contracts and the underlying instruments, which may prove to be incorrect. In
addition, there may be imperfect correlation between the instruments being
hedged and the futures contract subject to the option. Certain characteristics
of the futures market might increase the risk that movements in the prices of
futures contracts or options on futures contracts might not correlate perfectly
with movements in the prices of the investments being hedged. For example, all
participants in the futures and options on futures contracts markets are subject
to daily variation margin calls and might be compelled to liquidate futures or
options on futures contracts positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase the
price volatility of the instruments and distort the normal price relationship
between the futures or options and the investments being hedged. Also, because
of initial margin deposit requirements, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, "program trading," and
other investment strategies might result in temporary price distortions.
Over-the-counter options have the risk of the potential inability of
counterparties to meet the terms of their contracts. The Fund's maximum equity
price risk for purchased options is limited to the premium initially paid. In
addition, certain risks may arise upon entering into option contracts including
the risk that an illiquid secondary market will limit the Fund's ability to
close out an option contract prior to the expiration date and that a change in
the value of the option contract may not correlate exactly with changes in the
value of the securities hedged.
As of October 31, 2014, there were no options contracts outstanding.
Page 25
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2014
3. DERIVATIVES TRANSACTIONS
For the year ended October 31, 2014, written option activity was as follows:
NUMBER
OF
WRITTEN OPTIONS CONTRACTS PREMIUMS
----------------------------------------------------------------------------
Options outstanding at October 31, 2013 ... -- $ --
Options Written............................ 50 22,478
Options Expired............................ -- --
Options Exercised.......................... -- --
Options Closed............................. (50) (22,478)
---- ----------
Options outstanding at October 31, 2014.... -- $ --
---- ----------
During the year ended October 31, 2014, the Fund held purchased options with
market values ranging from $0 to $89,063, as measured at each quarter end.
During the year ended October 31, 2014, the amount of notional values of futures
contracts opened and closed were $41,483,450 and $59,807,825, respectively.
The following table presents the amount of net realized gain (loss) and change
in net unrealized appreciation (depreciation) recognized for the year ended
October 31, 2014, on derivative instruments, as well as the primary underlying
risk exposure associated with each instrument.
STATEMENT OF OPERATIONS LOCATION EQUITY RISK
----------------------------------------------------------------------------
Net realized gain (loss) on Investments*..................... $ (55,458)
Net realized gain (loss) on Written options transactions..... 20,710
Net change in unrealized gain (loss) on Investments*......... --
Net change in unrealized gain (loss) on Written options
transactions --
INTEREST RATE
RISK
------------
Net realized gain (loss) on Futures contracts................ $ (810,604)
Net change in unrealized gain (loss) on Futures contracts.... 142,734
* Purchased options are included within investments.
4. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
services, First Trust is entitled to a monthly fee calculated at an annual rate
of 0.80% of the Fund's average daily net assets. First Trust also provides fund
reporting services to the Fund for a flat annual fee in the amount of $9,250.
Stonebridge, an affiliate of First Trust, 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 0.40% of average daily net assets that is paid by First Trust out of its
investment advisory fee.
First Trust and Stonebridge have agreed to waive fees and/or pay Fund expenses
to the extent necessary to prevent the annual operating expenses of the Fund
(excluding 12b-1 distribution and service fees, interest expenses, taxes, fees
incurred in acquiring and disposing of portfolio securities and extraordinary
expenses) from exceeding 1.15% of average daily net assets of any class of
Shares of the Fund (the "Expense Cap") until February 28, 2016 and then will not
exceed 1.50% from March 1, 2016 to February 28, 2025 (the "Expense Cap
Termination Date"). Expenses borne and fees waived by First Trust and
Stonebridge are subject to recovery on a Fund class level by First Trust and
Stonebridge up to three years from the date the fee was waived or expense was
incurred, but no reimbursement payment will be made by the Fund at any time if
it would result in the Fund's expenses exceeding its Expense Cap in place at the
Page 26
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2014
time the expense was borne or the fee was waived by First Trust and Stonebridge.
Class A and Class I amounts are included as "Expenses previously waived or
reimbursed" on the Statement of Operations. The advisory fee waivers and expense
reimbursement for the year ended October 31, 2014 and the expenses borne by
First Trust and Stonebridge subject to recovery for the periods indicated were
as follows:
EXPENSES SUBJECT TO RECOVERY
------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
ADVISORY EXPENSE OCTOBER 31, OCTOBER 31, OCTOBER 31,
FEE WAIVER REIMBURSEMENT 2012 2013 2014 TOTAL
------------ ------------ ------------ ------------ ------------ ------------
$ 50,893 $ -- $ 320,165 $ 134,127 $ 50,893 $ 505,185
Brown Brothers Harriman & Co. ("BBH") serves as the Fund's administrator, fund
accountant and custodian in accordance with certain fee arrangements. As
administrator and fund accountant, BBH is responsible for providing certain
administrative and accounting services to the Fund, including maintaining the
Fund's books of account, records of the Fund's securities transactions, and
certain other books and records. As custodian, BBH is responsible for custody of
the Fund's assets.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
transfer agent in accordance with certain fee arrangements. As transfer agent,
BNYM IS is responsible for maintaining shareholder records for the Fund.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated pro rata among each fund in the First Trust Fund
Complex based on net assets. Each Independent Trustee is also paid an annual per
fund fee that varies based on whether the fund is a closed-end or other actively
managed fund, or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
additional annual fees to serve in such capacities, with such compensation
allocated pro rata among each fund in the First Trust Fund Complex based on net
assets. Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and Committee
Chairmen rotate every three years. The officers and "Interested" Trustee receive
no compensation from the Trust for acting in such capacities.
5. CAPITAL SHARE TRANSACTIONS
Capital transactions were as follows:
YEAR ENDED YEAR ENDED
OCTOBER 31, 2014 OCTOBER 31, 2013
SHARES VALUE SHARES VALUE
---------- ------------- ---------- -------------
Sales:
Class A 377,644 $ 7,798,542 3,083,747 $ 68,291,292
Class C 167,887 3,518,855 1,452,121 32,374,730
Class F 38,025 792,945 155,308 3,480,067
Class I 2,252,138 47,755,228 3,798,513 83,448,983
Class R3 -- -- -- --
---------- ------------- ---------- -------------
Total Sales: 2,835,694 $ 59,865,570 8,489,689 $ 187,595,072
========== ============= ========== =============
Dividend Reinvestment:
Class A 131,229 $ 2,727,650 181,625 $ 3,925,189
Class C 92,688 1,935,807 80,753 1,739,629
Class F 6,467 136,053 7,071 154,083
Class I 127,423 2,670,901 131,601 2,852,530
Class R3 -- -- -- --
---------- ------------- ---------- -------------
Total Dividend Reinvestment: 357,807 $ 7,470,411 401,050 $ 8,671,431
========== ============= ========== =============
Redemptions
Class A (3,413,022) $ (71,154,976) (2,545,437) $ (54,289,190)
Class C (857,812) (17,752,129) (439,287) (9,160,688)
Class F (104,919) (2,212,870) (157,069) (3,268,967)
Class I (1,925,291) (39,889,665) (3,064,349) (65,385,546)
Class R3 (4,679) (97,810) (3,863) (80,051)
---------- ------------- ---------- -------------
Total Redemptions: (6,305,723) $(131,107,450) (6,210,005) $(132,184,442)
========== ============= ========== =============
Page 27
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2014
6. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, other than short-term
investments, for the year ended October 31, 2014, were $282,019,308 and
$343,016,125, respectively.
7. BORROWINGS
Effective March 28, 2013, the Trust and the First Trust Variable Insurance Trust
entered into a $20 million Committed Line of Credit ("Line of Credit") with The
Bank of Nova Scotia ("Scotia") to be a liquidity backstop during periods of high
redemption volume. On July 30, 2013, the Line of Credit was increased to $50
million and First Trust Exchange-Traded Fund III and First Trust Exchange-Traded
Fund IV were added to the Credit Agreement. A commitment fee of 0.125% of the
daily amount of the excess of the commitment amount over the outstanding
principal balance of the loans was charged by Scotia, which First Trust
allocated amongst the funds that had access to the Line of Credit. To the extent
that the Fund accessed the credit line, there would also be an interest fee
charged.
The Line of Credit terminated on April 25, 2014. Effective April 25, 2014, the
Trust, First Trust Exchange-Traded Fund III and First Trust Exchange-Traded Fund
IV entered into an $80 million Credit Agreement with Scotia as administrative
agent for a group of lenders. A commitment fee of 0.125% of the daily amount of
the excess of the commitment amount over the outstanding principal balance of
the loans is charged by Scotia, which First Trust allocates amongst the funds
that have access to the Line of Credit. To the extent that the Fund accesses the
Line of Credit, there would also be an interest fee charged.
The Fund did not have any borrowings outstanding during the year ended October
31, 2014.
8. DISTRIBUTION AND SERVICE PLAN
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the share
classes of the Fund are authorized to pay an amount up to 0.25%, 1.00%, 0.15%
and 0.50% of their average daily net assets each year for Class A, Class C,
Class F and Class R3, respectively, to reimburse and compensate First Trust
Portfolios L.P. ("FTP"), the distributor of the Fund, for amounts expended to
finance activities primarily intended to result in the sale of Fund shares or
the provision of investor services. FTP may also use this amount to compensate
securities dealers or other persons for providing distribution assistance,
including broker-dealer and shareholder support and educational and promotional
services.
9. 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.
10. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued and has determined that there were
no subsequent events requiring recognition of disclosures in the financial
statements that have not already been disclosed.
Page 28
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST PREFERRED SECURITIES
AND INCOME FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust Preferred Securities and Income Fund (the "Fund"), a series of the First
Trust Series Fund, including the portfolio of investments, as of October 31,
2014, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the periods presented. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
The Fund is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of October 31, 2014 by correspondence with the Fund's
custodian and brokers; where replies were not received, we performed other
auditing procedures. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Trust Preferred Securities and Income Fund as of October 31, 2014, and the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and the financial highlights
for each of the periods presented, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
December 23, 2014
Page 29
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2014 (UNAUDITED)
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Trust uses to determine
how to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website at http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's 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.
TAX INFORMATION
The Fund hereby designates as qualified dividend income 52.23% of its ordinary
income distributions (including short-term capital gains, if applicable) for the
period ended October 31, 2014. 24.71% of the ordinary income (including
short-term capital gain, if applicable) distributions made by the Fund during
the period ended October 31, 2014, qualify for corporate dividends received
deduction available to corporate shareholders.
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.
MARKET RISK: Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory
or market developments, changes in interest rates and perceived trends in stock
prices. Overall stock values could decline generally or could underperform other
investments. Companies with smaller market capitalizations are generally subject
to additional market risk.
INTEREST RATE RISK: If interest rates rise, the prices of fixed-rate preferred
securities and other fixed-rate debt securities held by the Fund will fall.
PREFERRED SECURITIES RISK: Preferred securities combine some of the
characteristics of both common stocks and bonds. Preferred securities are
typically subordinated to bonds and other debt instruments in a company's
capital structure, in terms of priority to corporate income, and therefore will
be subject to greater credit risk than those debt instruments. Preferred
securities are also subject to credit risk, interest rate risk and income risk.
CONCENTRATION RISK: A fund concentrated in a single industry or sector is likely
to present more risks than a fund that is broadly diversified over several
industries or sectors. Compared to the broad market, an individual industry or
sector may be more strongly affected by changes in the economic climate, broad
market shifts, moves in a particular dominant stock, or regulatory changes.
CREDIT RISK: Credit risk is the risk that an issuer of a security may be unable
or unwilling to make dividend, interest and principal payments when due and the
related risk that the value of a security may decline because of concerns about
the issuer's ability or willingness to make such payments. In addition, parties
to other financial contracts with the Fund could default on their obligations.
CURRENCY RISK: Although the Fund's net asset value is determined on the basis of
U.S. dollars, because the Fund invests in foreign securities, you may lose money
if the local currency of a foreign market depreciates against the U.S. dollar,
even if the local currency value of the Fund's holdings goes up.
DEPOSITARY RECEIPTS RISK: Depositary receipts may be less liquid than the
underlying shares in their primary trading market. Any distributions paid to the
holders of depositary receipts are usually subject to a fee charged by the
depositary. Holders of depositary receipts may have limited voting rights, and
investment restrictions in certain countries may adversely impact the value of
depositary receipts because such restrictions may limit the ability to convert
equity shares into depositary receipts and vice versa. Such restrictions may
cause equity shares of the underlying issuer to trade at a discount or premium
to the market price of the depositary receipts.
Page 30
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2014 (UNAUDITED)
FINANCIAL COMPANY RISK: The Fund invests in the securities of financial
companies, which may include banks, thrifts, brokerage firms, broker-dealers,
investment banks, finance companies, REITs and companies involved in the
insurance industry. Banks, thrifts and their holding companies are especially
subject to the adverse effects of economic recession; government regulation;
decreases in the availability of capital; volatile interest rates; portfolio
concentrations in geographic markets and in commercial and residential real
estate loans; and competition from new entrants in their fields of business.
ILLIQUID SECURITIES RISK: Illiquid securities involve the risk that the
securities will not be able to be sold at the time desired by the Fund or at
prices approximately the value at which the Fund is carrying the securities on
its books.
INCOME RISK: If interest rates fall, the income from the Fund's portfolio will
decline as the Fund invests the proceeds from new share sales, or from matured
or called debt securities, at interest rates that are below the portfolio's
current earnings rate.
NON-DIVERSIFICATION RISK: The Fund is classified as "non-diversified" under the
1940 Act. As a result, the Fund is only limited as to the percentage of its
assets which may be invested in the securities of any one issuer by the
diversification requirements imposed by the Code. The Fund may invest a
relatively high percentage of its assets in a limited number of issuers. As a
result, the Fund may be more susceptible to a single adverse economic or
regulatory occurrence affecting one or more of these issuers, experience
increased volatility and be highly concentrated in certain issuers.
REIT RISK: Investing in REITs involves risks related to their structure and
focus, which include, but are not limited to, dependency upon management skills,
limited diversification, the risks of locating and managing financing for
projects, heavy cash flow dependency, possible default by borrowers, the costs
and potential losses of self-liquidation of one or more holdings, the risk of a
possible lack of mortgage funds and associated interest rate risks,
overbuilding, property vacancies, increases in property taxes and operating
expenses, changes in zoning laws, losses due to environmental damages, changes
in neighborhood values and appeal to purchases, the possibility of failing to
maintain exemptions from registration under the 1940 Act and, in many cases,
relatively small market capitalization, which may result in less market
liquidity and greater price volatility. Fund shareholders indirectly pay REIT
fees and expenses.
NON U.S. SECURITIES RISK: The Fund may invest in securities of non U.S. issuers.
Such securities are subject to higher volatility than securities of domestic
issuers due to possible adverse political, social or economic developments;
restrictions on foreign investment or exchange of securities; lack of liquidity;
currency exchange rates; excessive taxation; government seizure of assets;
different legal or accounting standards; and less government supervision and
regulation of exchanges in foreign countries.
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING APPROVAL OF CONTINUATION OF INVESTMENT MANAGEMENT
AND INVESTMENT SUB-ADVISORY AGREEMENTS
The Board of Trustees of the First Trust Series Fund (the "Trust"), including
the Independent Trustees, unanimously approved the continuation of the
Investment Management Agreement (the "Advisory Agreement") between the Trust, on
behalf of the First Trust Preferred Securities and Income Fund (the "Fund"), and
First Trust Advisors L.P. (the "Advisor" or "First Trust") and the Investment
Sub-Advisory Agreement (the "Sub-Advisory Agreement" and together with the
Advisory Agreement, the "Agreements") among the Trust, on behalf of the Fund,
the Advisor and Stonebridge Advisors LLC (the "Sub-Advisor"), at a meeting held
on June 8-9, 2014. The Board of Trustees determined that the continuation of the
Agreements is in the best interests of the Fund in light of the extent and
quality of the services provided and such other matters as the Board considered
to be relevant in the exercise of its reasonable business judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. 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 its affiliates, First
Trust Portfolios L.P. ("FTP") and the Sub-Advisor; and information on the
Advisor's and the Sub-Advisor's compliance programs. Following receipt of this
information, counsel to the Independent Trustees posed follow-up questions to
the Advisor, and the Independent Trustees and their counsel met separately to
discuss the information provided by the Advisor and the Sub Advisor, including
the supplemental responses. The Board applied its business judgment to determine
Page 31
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2014 (UNAUDITED)
whether the arrangements between the Trust and the Advisor and among the Trust,
the Advisor and the Sub-Advisor are reasonable business arrangements from the
Fund's perspective as well as from the perspective of shareholders. The Board
considered that shareholders chose to invest or remain invested in the Fund
knowing that the Advisor and the Sub-Advisor manage the Fund.
In reviewing the Agreements, the Board considered the nature, extent and quality
of services provided by the Advisor and the Sub-Advisor under the Agreements.
The Board considered the Advisor's statements regarding the incremental benefits
associated with the Fund's advisor/sub-advisor management structure. With
respect to the Advisory Agreement, the Board considered that the Advisor is
responsible for the overall management and administration of the Fund and
reviewed the services provided by the Advisor to the Fund, including the
oversight of the Sub-Advisor. The Board noted the compliance program that had
been developed by the Advisor and considered that it includes a robust program
for monitoring the Sub-Advisor's compliance with the 1940 Act and the Fund's
investment objective and policies. With respect to the Sub-Advisory Agreement,
the Board noted the background and experience of the Sub-Advisor's portfolio
management team. The Board also reviewed the materials provided by the
Sub-Advisor and considered the services that the Sub-Advisor provides to the
Fund, including the Sub-Advisor's day-to-day management of the Fund's
investments. The Board noted the background and experience of the Sub-Advisor's
portfolio management team, and recent additions to the team. The Board noted its
familiarity with the Sub-Advisor, including its oversight of two other funds in
the First Trust fund complex sub-advised by the Sub-Advisor, the First Trust
Preferred Securities and Income ETF (the "ETF") and the First Trust Intermediate
Duration Preferred & Income Fund (the "Closed-End Fund"). In light of the
information presented and the considerations made, the Board concluded that the
nature, extent and quality of services provided to the Fund by the Advisor and
the Sub-Advisor under the Agreements have been and are expected to remain
satisfactory and that the Sub-Advisor, under the oversight of the Advisor, has
managed the Fund consistent with its investment objective and policies.
The Board considered the advisory and sub-advisory fees paid under the
Agreements. The Board considered the advisory fees charged by the Advisor to
similar funds and other non-fund clients, including the ETF and the Closed-End
Fund, and that the Advisor provides services to certain separately managed
accounts that may have investment objectives and policies similar to the Fund's.
The Board noted that the Advisor charges a lower advisory fee rate to the
separately managed accounts, as well as the Advisor's statement that the nature
of the services provided to the separately managed accounts is not comparable to
those provided to the Fund. The Board considered the sub-advisory fee and how it
relates to the Fund's overall advisory fee structure and noted that the
sub-advisory fee is paid by the Advisor from its advisory fee. The Board also
considered information provided by the Sub-Advisor as to the fees it charges to
other similar clients, including from serving as sub-advisor to the ETF and the
Closed-End Fund. In addition, the Board reviewed data prepared by Lipper Inc.
("Lipper"), an independent source, showing the advisory fees and expense ratios
of the Fund as compared to the advisory fees and expense ratios of an expense
peer group selected by Lipper and similar data from the Advisor for a separate
peer group selected by the Advisor. The Board noted that the Lipper and Advisor
peer groups included only three overlapping peer funds. The Board discussed with
representatives of the Advisor the limitations in creating a relevant peer group
for the Fund, including that (i) the Fund is unique in its composition, which
makes assembling peers with similar strategies and asset mix difficult; (ii)
some of the peer funds are significantly larger than the Fund, which causes the
Fund's fixed expenses to be higher on a percentage basis as compared to the
larger peer funds and (iii) most peer funds do not employ an advisor/sub advisor
management structure. The Board took these limitations into account in
considering the peer data. In reviewing the peer data, the Board noted that the
Fund's contractual advisory fee was above the median of the Lipper peer group.
The Board considered that the Advisor and Sub-Advisor agreed to waive fees
and/or pay Fund expenses through February 28, 2016 to the extent necessary to
prevent the annual operating expenses of the Fund (excluding taxes, interest,
all brokerage commissions, other normal charges incident to the purchase and
sale of portfolio securities, distribution and service fees payable pursuant to
a Rule 12b 1 plan, if any, and extraordinary expenses) from exceeding 1.15% of a
class' average daily net assets, and from March 1, 2016 through February 28,
2025 to the extent necessary to prevent annual operating expenses (with the same
exclusions) from exceeding 1.50% of a class' average daily net assets. The Board
noted that fees waived or expenses borne by the Advisor and Sub-Advisor are
subject to reimbursement by the Fund for up to three years from the date the
fees were waived or expense was incurred, but no reimbursement payment would be
made by the Fund if it would result in the Fund exceeding an expense ratio equal
to the expense cap in place at the time the fees were waived or the expenses
were borne by the Advisor and Sub-Advisor.
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 and portfolio risk on an ongoing basis. 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 reviewed
data prepared by Lipper comparing the Fund's performance (based on Class A
shares) for the one-year and since-inception periods ended December 31, 2013 to
a performance peer universe selected by Lipper and to a benchmark. In reviewing
the Fund's performance as compared to the performance of the Lipper performance
peer universe, the Board took into account the limitations described above with
respect to creating a relevant peer group for the Fund. The Board also
considered the Fund's dividend yield as of March 31, 2014. Based on the
information presented, the Board noted that the Fund's performance was below the
median of its Lipper peer universe for the one-year and since-inception periods
ended December 31, 2013, and considered the Advisor's and the Sub-Advisor's
review of Fund performance.
Page 32
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2014 (UNAUDITED)
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, extent and quality
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 noted the Advisor's statement that
economies of scale in providing services to the Fund are not available at
current asset levels. The Board also considered the costs of the services
provided and any profits realized by the Advisor from serving as investment
advisor to the Fund for the twelve months ended December 31, 2013, as well as
product-line profitability data for the same period, as set forth in the
materials provided to the Board. The Board noted the inherent limitations in the
profitability analysis, and considered that the Advisor estimated that the Fund
was not profitable for the Advisor. In addition, the Board considered fall-out
benefits described by the Advisor that may be realized from its relationship
with the Fund. The Board noted that in addition to the advisory fees paid by the
Fund, FTP is compensated for services provided to the Fund through 12b-1 fees
and that First Trust also is compensated for providing fund reporting services
to the Fund. The Board considered FTP's ownership interest in the Sub-Advisor
and potential fall-out benefits to the Advisor from such ownership interest.
The Board considered the Sub-Advisor's estimated costs in providing investment
services to the Fund and noted the Sub-Advisor's recent hiring of additional
personnel to work on the Fund. The Board also considered the Sub-Advisor's
statement that it does not expect economies of scale in connection with
providing services to the Fund. The Board noted that the sub-advisory fee rate
was negotiated at arm's length between the Advisor and the Sub-Advisor. The
Board also reviewed information provided by the Sub-Advisor as to the
profitability of the Sub-Advisory Agreement to the Sub-Advisor. The Board noted
the inherent limitations in the profitability analysis and concluded that the
profitability analysis for the Advisor was more relevant, although the
profitability of the Sub-Advisory Agreement appeared not to be excessive in
light of the services provided to the Fund. The Board considered the fall-out
benefits realized by Sub-Advisor from its relationship with the Fund, including
potential fall-out benefits to the Sub-Advisor from the ownership interest of
FTP in the Sub-Advisor. The Board noted that the Sub-Advisor does not maintain
any soft-dollar arrangements.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreements continue to be fair and reasonable and that the continuation
of the Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 33
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2014 (UNAUDITED)
The Trust's statement of additional information includes additional information
about the Trustees and is available, without charge, upon request, by calling
(800) 988-5891.
NUMBER OF OTHER
PORTFOLIOS IN TRUSTEESHIPS OR
THE FIRST TRUST DIRECTORSHIPS
NAME, ADDRESS, TERM OF OFFICE FUND COMPLEX HELD BY TRUSTEE
DATE OF BIRTH AND AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE TRUST SERVICE DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Indefinite Term Physician; President, Wheaton Orthopedics; 111 None
c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate
120 East Liberty Drive, o Since Trust Limited Partnership; Member, Sportsmed
Suite 400 Inception LLC
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Indefinite Term President (March 2010 to Present), Senior 111 Director of ADM
c/o First Trust Advisors L.P. Vice President and Chief Financial Officer Investor Services,
120 East Liberty Drive, o Since Trust (May 2007 to March 2010), ADM Investor Inc., ADM
Suite 400 Inception Services, Inc. (Futures Commission Investor Services
Wheaton, IL 60187 Merchant) International, and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Indefinite Term President (2003 to Present), Hibs 111 Director of Trust
c/o First Trust Advisors L.P. Enterprises (Financial and Management Company of
120 East Liberty Drive, o Since Trust Consulting) Illinois
Suite 400 Inception
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Indefinite Term Managing Director and Chief Operating 111 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant
120 East Liberty Drive, o Since Trust Harapan Educational Foundation Transport, Inc.
Suite 400 Inception (Educational Products and Services); (May 2003 to
Wheaton, IL 60187 President and Chief Executive Officer May 2014)
D.O.B.: 03/54 (June 2012 to September 2014), Servant
Interactive LLC (Educational Products and
Services); President and Chief Executive
Officer (June 2012 to September 2014), Dew
Learning LLC (Educational Products and
Services); President (June 2002 to June 2012),
Covenant College
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee, o Indefinite Term Chief Executive Officer (December 2010 to 111 None
Chairman of the Board Present), President (until December 2010),
120 East Liberty Drive, o Since Trust First Trust Advisors L.P. and First Trust
Suite 400 Inception Portfolios L.P.; Chairman of the Board of
Wheaton, IL 60187 Directors, BondWave LLC (Software
D.O.B.: 09/55 Development Company/Investment Advisor
and Stonebridge Advisors LLC (Investment
Advisor)
-------------------
(1) Mr. Bowen is deemed an "interested person" of the Trust due to his
position as Chief Executive Officer of First Trust Advisors L.P.,
investment advisor of the Trust.
Page 34
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2014 (UNAUDITED)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH TRUST LENGTH OF SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(2)
------------------------------------------------------------------------------------------------------------------------------------
Mark R. Bradley President and Chief o Indefinite Term Chief Operating Officer (December 2010 to Present)
120 E. Liberty Drive, Executive Officer and Chief Financial Officer, First Trust Advisors
Suite 400 o Since January 2012 L.P. and First Trust Portfolios L.P.; Chief Financial
Wheaton, IL 60187 Officer, BondWave LLC (Software Development
D.O.B.: 11/57 Company/Investment Advisor) and Stonebridge
Advisors LLC (Investment Advisor)
James M. Dykas Treasurer, Chief Financial o Indefinite Term Controller (January 2011 to Present), Senior Vice
120 E. Liberty Drive, Officer and Chief President (April 2007 to Present), First Trust
Suite 400 Accounting Officer o Since January 2012 Advisors L.P. and First Trust Portfolios L.P.
Wheaton, IL 60187
D.O.B.: 01/66
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P., First
120 E. Liberty Drive, Legal Officer Trust Portfolios L.P.; Secretary, BondWave LLC
Suite 400 o Since Trust Inception (Software Development Company/Investment
Wheaton, IL 60187 Advisor) and Stonebridge Advisors LLC
D.O.B.: 05/60 (Investment Advisor)
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present), Senior
120 E. Liberty Drive, Vice President (September 2005 to July 2012),
Suite 400 o Since Trust Inception First Trust Advisirs L.P. and First Trust Portfolios
Wheaton, IL 60187 L.P.
D.O.B.: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust Advisors
120 E. Liberty Drive, and Assistant Secretary L.P. and First Trust
Portfolios L.P.
Suite 400 o Chief Compliance
Wheaton, IL 60187 Officer since January
D.O.B.: 12/66 2011
o Assistant Secretary
since Trust Inception
-------------------
(2) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 35
--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2014 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and considers your privacy an
important priority in maintaining that relationship. We are committed to
protecting the security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies".
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information within First Trust.
PRIVACY ONLINE
We allow third-party companies, including AddThis (a social media sharing
service), to collect certain anonymous information when you visit our website.
These companies may use non-personally identifiable information during your
visits to this and other websites in order to provide advertisements about goods
and services likely to be of greater interest to you. These companies typically
use a cookie, third party web beacon or pixel tags, to collect this information.
To learn more about this behavioral advertising practice, you can visit
www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, First Trust restricts access to
your nonpublic personal information to those First Trust employees who need to
know that information to provide products or services to you. We maintain
physical, electronic and procedural safeguards to protect your nonpublic
personal information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
Page 36
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Stonebridge Advisors, LLC
187 Danbury Road
Wilton, CT 06897
ADMINISTRATOR,
FUND ACCOUNTANT &
CUSTODIAN
Brown Brothers Harriman & Co.
50 Post Office Square
Boston, MA 02110
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
FIRST TRUST
First Trust/Confluence
Small Cap Value Fund
-----------------------------------------
Annual Report
For the Year Ended October 31, 2014
Confluence Investment Management
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
ANNUAL REPORT
OCTOBER 31, 2014
Shareholder Letter ......................................................... 1
At a Glance ................................................................ 2
Portfolio Commentary ....................................................... 4
Understanding Your Fund Expenses ........................................... 6
Portfolio of Investments ................................................... 7
Statement of Assets and Liabilities ........................................ 9
Statement of Operations .................................................... 10
Statements of Changes in Net Assets ........................................ 11
Financial Highlights ....................................................... 12
Notes to Financial Statements .............................................. 16
Report of Independent Registered Public Accounting Firm .................... 21
Additional Information ..................................................... 22
Board of Trustees and Officers ............................................. 26
Privacy Policy ............................................................. 28
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Confluence Investment Management LLC
("Confluence" 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/Confluence Small Cap Value Fund (the "Fund") to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. When evaluating the information
included in this report, you are cautioned not to place undue reliance on these
forward-looking statements, which reflect the judgment of the Advisor and/or
Sub-Advisor and their respective representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of Fund shares
may therefore be less than what you paid for them. Accordingly, you can lose
money by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns and net asset value 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
Confluence 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 Fund regulatory filings.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
OCTOBER 31, 2014
Dear Shareholders:
I am pleased to present you with the annual report for your investment in First
Trust/Confluence Small Cap Value Fund (the "Fund"). This report provides
detailed information about the Fund, including a performance review and the
financial statements for the past 12 months. I encourage you to read this
document and discuss it with your financial advisor.
Although markets have seemed choppy over the past 12 months, the U.S. has shown
sustained growth over the period. In fact, the S&P 500(R) Index, as measured on
a total return basis, rose 17.27% during the period. First Trust Advisors L.P.
("First Trust") believes that staying invested in quality products through
different types of markets can benefit investors over the long term.
First Trust offers a variety of products that we believe could fit the financial
plans for many investors seeking long-term investment success. We invite you to
look at our investment products with your financial advisor to determine if any
of them might fit your financial goals. We believe that regularly discussing
your financial objectives and investment options with your financial advisor can
help keep you on track.
First Trust will continue to make available up-to-date information about your
investments so you and your financial advisor are current on any First Trust
investments you own. We value our relationship with you, and thank you for the
opportunity to assist you in achieving your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
"AT A GLANCE"
AS OF OCTOBER 31, 2014 (UNAUDITED)
-----------------------------------------------------------
FUND STATISTICS
-----------------------------------------------------------
NET ASSET
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND VALUE (NAV)
-----------------------------------------------------------
Class A (FOVAX) $28.03
Class C (FOVCX) $26.44
Class I (FOVIX) $28.52
Class R3 (FOVRX) $27.17
-----------------------------------------------------------
-----------------------------------------------------------
% OF TOTAL
TOP TEN HOLDINGS INVESTMENTS
-----------------------------------------------------------
VCA, Inc. 4.4%
Taminco Corp. 3.9
Snyder's-Lance, Inc. 3.8
Mueller Industries, Inc. 3.8
RE/MAX Holdings, Inc., Class A 3.8
RLI Corp. 3.8
Landstar Systems, Inc. 3.8
Haemonetics Corp. 3.8
Ritchie Bros. Auctioneers, Inc. 3.7
West Pharmaceutical Services, Inc. 3.6
-------
Total 38.4%
=======
-----------------------------------------------------------
% OF TOTAL
SECTOR ALLOCATION INVESTMENTS
-----------------------------------------------------------
Industrials 33.5%
Financials 24.8
Health Care 18.7
Consumer Discretionary 10.2
Materials 6.4
Consumer Staples 3.8
Energy 2.6
-------
Total 100.0%
=======
Page 2
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
"AT A GLANCE" (CONTINUED)
AS OF OCTOBER 31, 2014 (UNAUDITED)
-----------------------------------------------------------
PERFORMANCE OF A $10,000 INVESTMENT
-----------------------------------------------------------
This chart compares your Fund's Class I performance to that
of the Russell 2000(R) Value Index and the Russell 2000(R)
Index from 1/11/2011 through 10/31/2014.
First Trust/Confluence Small Cap Russell 2000(R) Russell 2000(R)
Value Fund - Class I Shares Value Index Index
1/11/2011 $10,000 $10,000 $10,000
4/30/2011 10,730 10,966 10,716
10/31/2011 9,790 9,457 9,261
4/30/2012 10,554 10,499 10,323
10/31/2012 10,951 10,599 10,601
4/30/2013 12,260 12,309 12,307
10/31/2013 13,892 14,023 14,389
4/30/2014 14,285 14,720 14,832
10/31/2014 15,214 15,129 15,548
---------------------------------------------------------------------------------------------------------------
PERFORMANCE AS OF OCTOBER 31, 2014
---------------------------------------------------------------------------------------------------------------
I SHARES R3 SHARES
A SHARES C SHARES Inception Inception
Inception 2/24/2011 Inception 3/2/2011 1/11/2011 3/2/2011 R2000V* R2000*
---------------------------------------------------------------------------------------------------------------
W/MAX
1.00%
W/MAX CONTINGENT
W/O 5.50% W/O DEFERRED W/O W/O W/O W/O
AVERAGE ANNUAL SALES SALES SALES SALES SALES SALES SALES SALES
TOTAL RETURNS CHARGES CHARGE CHARGES CHARGE CHARGES CHARGES CHARGES CHARGES
1 Year 9.23% 3.22% 8.36% 7.36% 9.51% 8.81% 7.89% 8.06%
Since Inception 11.26% 9.57% 9.36% 9.36% 11.65% 10.29% 11.51% 12.31%
---------------------------------------------------------------------------------------------------------------
*Since inception return is based on the Class I Shares inception date.
Performance figures assume reinvestment of all dividend distributions and do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total returns would have
been lower if certain fees had not been waived and expenses reimbursed by the
Advisor. An index is a statistical composite that tracks a specified financial
market or sector. Unlike the Fund, the indices do not actually hold a portfolio
of securities and therefore do not incur the expenses incurred by the Fund.
These expenses negatively impact the performance of the Fund. The Fund's past
performance does not predict future performance.
Performance of share classes will vary due to differences in sales charges and
expenses. Average annual total return with sales charges includes payment of the
maximum sales charge of 5.50% for Class A Shares, a contingent deferred sales
charge ("CDSC") of 1.00% for Class C Shares in year one and 12b-1 service fees
of 0.25% per year of average daily net assets for Class A Shares and combined
Rule 12b-1 distribution and service fees of 1.00% per year of average daily net
assets for Class C Shares. Class I and Class R3 Shares do not have a front-end
sales charge or a CDSC; therefore, performance is at net asset value. The
combined Rule 12b-1 distribution and service fees are 0.50% of average daily net
assets for Class R3 Shares, while Class I Shares do not have these fees. Prior
to December 15, 2011, Class R3 Shares' combined Rule 12b-1 distribution and
service fees were 0.75% per year of average daily net assets.
Page 3
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
ANNUAL REPORT
OCTOBER 31, 2014
SUB-ADVISOR
Confluence Investment Management LLC, a registered investment advisor
("Confluence" or the "Sub-Advisor"), located in St. Louis, Missouri, serves as
the sub-advisor to First Trust/Confluence Small Cap Value Fund (the "Fund"). The
investment professionals at Confluence have over 80 years of aggregate portfolio
management experience. Confluence professionals have invested in a wide range of
specialty finance and other financial company securities during various market
cycles, working to provide attractive risk-adjusted returns to clients.
PORTFOLIO MANAGEMENT TEAM
MARK KELLER, CFA - CHIEF EXECUTIVE OFFICER AND CHIEF INVESTMENT OFFICER
DAVID MIYAZAKI, CFA - SENIOR VICE PRESIDENT AND PORTFOLIO MANAGER
DANIEL WINTER, CFA - SENIOR VICE PRESIDENT AND PORTFOLIO MANAGER
CHRIS STEIN - VICE PRESIDENT AND PORTFOLIO MANAGER
COMMENTARY
MARKET RECAP
The equity markets continued their advance during the Fund's fiscal year ended
October 31, 2014, with the Russell 2000 and Russell 2000 Value indices posting
positive returns of 8.06% and 7.89%, respectively. The results were relatively
meager compared to the prior year's 30+% returns, as the equity markets in 2014
confronted growing geopolitical risks, a slowdown in China, and more
importantly, the end of the Federal Reserve's Quantitative Easing (QE3) program.
These events clearly aided volatility, which had been very mild in the recent
past and was more evident in the small-capitalization arena of the market as the
Russell 2000 Value Index experienced a few sharp pullbacks over the course of
the Fund's fiscal year. However, the relative strength of the domestic economy
and the Federal Reserve's desire to maintain an accommodative interest rate
environment with its zero interest rate policy allowed investors to look past
these events and push markets upward.
The strength in the market was widespread with all sectors posting positive
returns except Energy, which recorded large declines reflective of the
precipitous drop in oil prices. The decrease in oil prices will benefit
consumers, help improve sentiment, and boost consumer spending. This, combined
with the Federal Reserve's accommodative stance, should provide for continued
economic growth, in our opinion.
The Fund's Class I shares generated gains of 9.51% during its fiscal year ended
October 31, 2014, outperforming the benchmarks. From inception (1/11/2011)
through the end of October, the Fund's Class I shares are up 11.65%, which is in
line with the performance of the Russell 2000 and Russell 2000 Value indices,
which posted gains of 12.31% and 11.51%, respectively, for the same period
(returns are annualized for periods greater than a year).
PERFORMANCE ANALYSIS
During the Fund's fiscal year ended October 31, 2014, the Producer Durables,
Technology and Consumer Discretionary sectors were the largest positive
contributors to the Fund's relative performance, while Health Care and Financial
Services were the biggest detractors (see attribution table).
Page 4
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
ANNUAL REPORT
OCTOBER 31, 2014
PORTFOLIO ATTRIBUTION
10/31/2013 - 10/31/2014
--------------------------------------------------------------------------------------------------------------------------
RUSSELL 2000 VALUE RUSSELL 2000 FUND ATTRIBUTION
----------------------- ----------------------- ----------------------- -----------------------
vs RSL vs RSL
SECTOR WGT RTN WGT RTN WGT RTN 2000VALUE 2000
Consumer Discretionary 10.41 6.83 13.13 1.52 9.84 9.07 0.23 0.94
Consumer Staples 2.55 1.99 3.51 8.12 3.04 1.45 (0.05) (0.21)
Energy 7.26 (21.09) 5.72 (18.08) 3.42 (16.19) 1.28 0.65
Financial Services 39.58 12.37 23.28 11.83 23.95 9.07 (1.49) (0.63)
Health Care 4.80 16.76 13.04 15.61 17.36 4.17 (1.07) (1.63)
Materials & Processing 4.62 0.99 4.96 2.96 2.93 8.43 0.33 0.25
Producer Durables 13.56 6.37 14.60 6.01 29.55 17.93 3.17 3.30
Technology 10.40 8.76 17.90 9.23 4.61 38.09 1.30 1.10
Utilities 6.81 16.68 3.86 14.73 0.00 0.00 (0.60) (0.28)
Cash 0.00 0.00 0.00 0.00 5.30 0.04 (0.42) (0.39)
--------------------------------------------------------------------------------------------------------------------------
Sources: Bloomberg and Confluence Investment Management. Index Data is based on
the respective Exchange-Traded Fund (iShares Russell 2000 and Russell 2000
Value).
The Fund's investment approach of managing risk - risk defined as the
probability of a permanent loss of capital - focuses our efforts on finding
quality businesses trading at bargain prices. This philosophy has helped
minimize losses during market downturns as it did in the previous periods, but
also tends to lag when there is a sharp upward move in the market, as leveraged
and cyclical businesses tend to garner investors' affections. With the
small-capitalization indexes, Russell 2000 and Russell 2000 Value, experiencing
a few sharp pullbacks, it does not surprise us that the Fund would outperform as
our emphasis on managing risk via focusing on high-quality businesses trading at
reasonable valuations attract more investor attention in volatile markets.
This approach is research-intensive and is deployed with a bottom-up focus of
investing in businesses in a relatively concentrated manner; therefore,
performance is ultimately driven by the underlying strength of the holdings of
the Fund and less influenced by macro or top-down sector weightings. The sector
weightings (over/under) are more of a byproduct of what the market is presenting
with an emphasis on owning a diversified portfolio of undervalued businesses.
In the Producer Durables sector, the Fund benefited from solid returns from
Landstar System (LSTR), Douglas Dynamics (PLOW), GrafTech International (GTI),
and Ritchie Brothers (RBA). All experienced returns of more than mid-twenties
percent for the fiscal year with improvements in either their businesses or
their outlooks. In the Consumer Discretionary sector, Select Comfort (SCSS) was
the sole contributor to sector outperformance, posting a 39% return as business
improved and management narrowed the focus on cash flow to benefit shareholders.
The Technology sector benefited from the underlying strength of Zebra
Technologies (ZBRA) and the acquisition of Hittite Microwave (HITT) at a premium
to the Fund's entry point and near our estimate of its intrinsic value.
The relative weakness in the Heath Care sector was driven by Vocera
Communications (VCRA), which was down approximately -50% as management struggled
to grow sales which were negatively impacting cash flow. The shares were sold
out of the Fund as we grew concerned with the lack of cash flow. In the
Financial Services sector, MVC Capital (MVC) underperformed during the period,
with shares down approximately -10%. The Fund also sold shares of MVC from the
portfolio during the third quarter.
MARKET AND FUND OUTLOOK:
Going forward, we expect continued economic growth, which should lead to revenue
growth, but we would also expect the Federal Reserve to curtail its
accommodative monetary policy over the next few quarters. We expect the markets
and the Fund to track economic growth, albeit in a more volatile fashion going
forward as the Federal Reserve actions become more heavily debated. As always,
we remain focused on company-specific fundamentals and growth prospects and
believe the current market will continue to provide the Fund with opportunities
to buy quality companies at reasonable prices.
Page 5
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
UNDERSTANDING YOUR FUND EXPENSES
AS OF OCTOBER 31, 2014 (UNAUDITED)
As a shareholder of the First Trust/Confluence Small Cap Value Fund, you incur
two types of costs: (1) transaction costs, including sales charges (loads) on
purchases of Class A Shares and contingent deferred sales charges on the lesser
of purchase price or redemption proceeds of Class C Shares; and (2) ongoing
costs, including management fees; distribution and/or service (12b-1) fees; and
other Fund expenses. This Example is intended to help you understand your
ongoing costs (in U.S. dollars) of investing in the Fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended October 31, 2014.
ACTUAL EXPENSES
The first three columns of the table below provide information about actual
account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid over the period. Simply divide your account value by $1,000 (for
example, an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the third column under the heading entitled "Expenses
Paid During Period" to estimate the expenses you paid on your account during the
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The next three columns of the table below provide information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing cost of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or contingent deferred sales charges. Therefore, the
hypothetical section of the table is useful in comparing ongoing costs only, and
will not help you determine the relative total costs of owning different funds.
In addition, if these transactional costs were included, your costs would have
been higher.
--------------------------------------------------------------------------------------------------------
HYPOTHETICAL
ACTUAL EXPENSES (5% RETURN BEFORE EXPENSES)
--------------------------------------------- -------------------------------------------
BEGINNING ENDING EXPENSES PAID BEGINNING ENDING EXPENSES PAID
ACCOUNT ACCOUNT DURING PERIOD ACCOUNT ACCOUNT DURING PERIOD ANNUALIZED
VALUE VALUE 5/01/2014 - VALUE VALUE 5/01/2014 - EXPENSE
5/01/2014 10/31/2014 10/31/2014 (a) 5/01/2014 10/31/2014 10/31/2014 (a) RATIOS (b)
--------------------------------------------------------------------------------------------------------
Class A $ 1,000.00 $ 1,063.00 $ 8.32 $ 1,000.00 $ 1,017.14 $ 8.13 1.60%
Class C 1,000.00 1,059.30 12.20 1,000.00 1,013.36 11.93 2.35
Class I 1,000.00 1,065.00 7.03 1,000.00 1,018.40 6.87 1.35
Class R3 1,000.00 1,061.70 9.61 1,000.00 1,015.88 9.40 1.85
(a) Expenses are equal to the annualized expense ratios, multiplied by the
average account value over the period (May 1, 2014 through October 31,
2014), multiplied by 184/365 (to reflect the six-month period).
(b) These expense ratios reflect expense caps.
Page 6
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2014
SHARES DESCRIPTION VALUE
------------- ---------------------------------------------------------------------------- --------------
COMMON STOCKS - 94.9%
AIR FREIGHT & LOGISTICS - 3.3%
2,585 Forward Air Corp............................................................ $ 123,744
--------------
BANKS - 3.4%
2,525 Bank of Marin Bancorp....................................................... 126,048
--------------
CAPITAL MARKETS - 3.1%
10,640 PennantPark Investment Corp. (a)............................................ 115,763
--------------
CHEMICALS - 6.1%
3,125 Rayonier Advanced Materials, Inc............................................ 89,156
5,300 Taminco Corp. (b)........................................................... 137,217
--------------
226,373
--------------
COMMERCIAL SERVICES & SUPPLIES - 3.6%
5,420 Ritchie Bros. Auctioneers, Inc.............................................. 132,194
--------------
ELECTRICAL EQUIPMENT - 6.2%
3,070 Franklin Electric Co., Inc.................................................. 114,634
4,687 Thermon Group Holdings, Inc. (b)............................................ 114,222
--------------
228,856
--------------
ENERGY EQUIPMENT & SERVICES - 2.5%
4,755 C&J Energy Services, Inc. (b)............................................... 91,819
--------------
FOOD PRODUCTS - 3.6%
4,541 Snyder's-Lance, Inc......................................................... 135,276
--------------
HEALTH CARE EQUIPMENT & SUPPLIES - 7.0%
3,515 Haemonetics Corp. (b)....................................................... 132,586
2,500 West Pharmaceutical Services, Inc........................................... 128,125
--------------
260,711
--------------
HEALTH CARE PROVIDERS & SERVICES - 7.4%
2,790 Patterson Cos., Inc......................................................... 120,277
3,395 VCA, Inc. (b)............................................................... 154,710
--------------
274,987
--------------
HOTELS, RESTAURANTS & LEISURE - 3.3%
9,703 Potbelly Corp. (b).......................................................... 123,810
--------------
INDUSTRIAL CONGLOMERATES - 1.0%
1,510 Raven Industries, Inc....................................................... 38,279
--------------
INSURANCE - 10.4%
3,945 Brown & Brown, Inc.......................................................... 125,688
7,845 OneBeacon Insurance Group Ltd., Class A..................................... 124,971
2,699 RLI Corp.................................................................... 133,843
--------------
384,502
--------------
LIFE SCIENCES TOOLS & SERVICES - 3.3%
1,365 Techne Corp................................................................. 124,283
--------------
MACHINERY - 10.7%
1,240 Douglas Dynamics, Inc....................................................... 25,705
1,465 Graco, Inc.................................................................. 115,003
4,117 John Bean Technologies Corp................................................. 123,386
4,154 Mueller Industries, Inc..................................................... 134,839
--------------
398,933
--------------
See Notes to Financial Statements Page 7
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
SHARES DESCRIPTION VALUE
------------- ---------------------------------------------------------------------------- --------------
COMMON STOCKS (CONTINUED)
MEDIA - 3.2%
1,714 Morningstar, Inc............................................................ $ 116,981
--------------
PROFESSIONAL SERVICES - 3.4%
1,559 Exponent, Inc............................................................... 124,439
--------------
REAL ESTATE INVESTMENT TRUSTS - 3.0%
6,150 Gladstone Commercial Corp................................................... 111,315
--------------
REAL ESTATE MANAGEMENT & DEVELOPMENT - 3.6%
4,213 RE/MAX Holdings, Inc., Class A.............................................. 134,816
--------------
ROAD & RAIL - 3.6%
1,806 Landstar System, Inc........................................................ 133,662
--------------
TEXTILES, APPAREL & LUXURY GOODS - 3.2%
6,300 Culp, Inc................................................................... 119,511
--------------
Total Investments - 94.9%................................................... 3,526,302
(Cost $3,032,865) (c)
Net Other Assets and Liabilities - 5.1%..................................... 188,506
--------------
Net Assets - 100.0%......................................................... $ 3,714,808
==============
-----------------------------
(a) Business Development Company.
(b) Non-income producing security.
(c) Aggregate cost for federal income tax purposes is $3,032,865. As of
October 31, 2014, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$551,211 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$57,774.
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of October 31,
2014 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
INVESTMENTS 10/31/2014 PRICES INPUTS INPUTS
--------------------------------------------------- ------------- ------------- ------------- -------------
Common Stocks*..................................... $ 3,526,302 $ 3,526,302 $ -- $ --
============= ============= ========== ==========
*See the Portfolio of Investments for industry breakout.
All transfers in and out of the Levels during the period are assumed to be on
the last day of the period at their current value. There were no transfers
between Levels at October 31, 2014.
Page 8 See Notes to Financial Statements
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2014
ASSETS:
Investments, at value
(Cost $3,032,865)........................................................................... $ 3,526,302
Cash........................................................................................... 244,482
Prepaid expenses............................................................................... 8,501
Receivables:
From Investment Advisor..................................................................... 18,693
Dividends................................................................................... 1,667
------------
Total Assets............................................................................. 3,799,645
------------
LIABILITIES:
Payables:
Audit and tax fees.......................................................................... 32,799
Administrative fees......................................................................... 17,629
Printing fees............................................................................... 10,470
Transfer agent fees......................................................................... 7,610
Fund shares repurchased..................................................................... 6,000
Legal fees.................................................................................. 3,909
12b-1 distribution and service fees......................................................... 1,843
Trustees' fees and expenses................................................................. 1,354
Custodian fees.............................................................................. 1,133
Commitment fees............................................................................. 1,112
Financial reporting fees.................................................................... 771
Other liabilities.............................................................................. 207
------------
Total Liabilities........................................................................... 84,837
------------
NET ASSETS..................................................................................... $ 3,714,808
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $ 2,960,684
Par value...................................................................................... 1,364
Accumulated net investment income (loss)....................................................... --
Accumulated net realized gain (loss) on investments............................................ 259,323
Net unrealized appreciation (depreciation) on investments...................................... 493,437
------------
NET ASSETS..................................................................................... $ 3,714,808
============
MAXIMUM OFFERING PRICE PER SHARE:
(Net assets are rounded to the nearest whole dollar and shares are rounded to the nearest
full share)
CLASS A SHARES:
Net asset value and redemption price per share (Based on net assets of $1,144,073 and
40,823 shares of beneficial interest issued and outstanding)................................ $ 28.03
Maximum sales charge (5.50% of offering price)................................................. 1.63
------------
Maximum offering price to public............................................................... $ 29.66
============
CLASS C SHARES:
Net asset value and redemption price per share (Based on net assets of $1,977,064 and
74,774 shares of beneficial interest issued and outstanding)................................ $ 26.44
============
CLASS I SHARES:
Net asset value and redemption price per share (Based on net assets of $592,319 and
20,769 shares of beneficial interest issued and outstanding)................................ $ 28.52
============
CLASS R3 SHARES:
Net asset value and redemption price per share (Based on net assets of $1,352 and 50 shares
of beneficial interest issued and outstanding).............................................. $ 27.17
============
See Notes to Financial Statements Page 9
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2014
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $431)............................................. $ 60,562
Interest....................................................................................... 67
Other.......................................................................................... 11
------------
Total investment income..................................................................... 60,640
------------
EXPENSES:
Transfer agent fees............................................................................ 82,078
Administrative fees............................................................................ 61,149
Registration fees.............................................................................. 53,119
Investment advisory fees....................................................................... 37,591
Audit and tax fees............................................................................. 34,545
12b-1 distribution and/or service fees:
Class A..................................................................................... 3,133
Class C..................................................................................... 20,565
Class R3.................................................................................... 7
Printing fees.................................................................................. 18,513
Trustees' fees and expenses.................................................................... 16,083
Commitment fees................................................................................ 9,329
Financial reporting fees....................................................................... 9,250
Legal fees..................................................................................... 3,134
Custodian fees................................................................................. 2,562
Listing expense................................................................................ 2,000
Other.......................................................................................... 5,301
------------
Total expenses.............................................................................. 358,359
Fees waived and expenses reimbursed by the investment advisor............................... (283,909)
------------
Net expenses................................................................................... 74,450
------------
NET INVESTMENT INCOME (LOSS)................................................................... (13,810)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments..................................................... 282,669
Net change in unrealized appreciation (depreciation) on investments......................... 49,701
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ 332,370
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 318,560
============
Page 10 See Notes to Financial Statements
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
10/31/2014 10/31/2013
------------ ------------
OPERATIONS:
Net investment income (loss)................................................... $ (13,810) $ (18,185)
Net realized gain (loss)....................................................... 282,669 170,521
Net change in unrealized appreciation (depreciation)........................... 49,701 379,609
------------ ------------
Net increase (decrease) in net assets resulting from operations................ 318,560 531,945
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A Shares................................................................. -- (7,587)
Class C Shares................................................................. -- (4,443)
Class I Shares................................................................. -- (1,775)
Class R3 Shares................................................................ -- (11)
------------ ------------
-- (13,816)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET REALIZED GAIN:
Class A Shares................................................................. (55,654) (2,739)
Class C Shares................................................................. (88,218) (3,897)
Class I Shares................................................................. (11,590) (530)
Class R3 Shares................................................................ (56) (5)
------------ ------------
(155,518) (7,171)
------------ ------------
Total distributions to shareholders............................................ (155,518) (20,987)
------------ ------------
CAPITAL TRANSACTIONS:
Proceeds from shares sold...................................................... 791,907 1,740,872
Proceeds from shares reinvested................................................ 133,876 14,134
Cost of shares redeemed........................................................ (894,811) (153,244)
------------ ------------
Net increase (decrease) in net assets resulting from capital transactions...... 30,972 1,601,762
------------ ------------
Total increase (decrease) in net assets........................................ 194,014 2,112,720
NET ASSETS:
Beginning of period............................................................ 3,520,794 1,408,074
------------ ------------
End of period.................................................................. $ 3,714,808 $ 3,520,794
============ ============
Accumulated net investment income (loss) at end of period...................... $ -- $ (9,707)
============ ============
See Notes to Financial Statements Page 11
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
CLASS A SHARES 10/31/2014 10/31/2013 10/31/2012 10/31/2011 (a)
------------ ------------ ------------ --------------
Net asset value, beginning of period............. $ 26.77 $ 21.58 $ 19.54 $ 20.10
---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (b)................. 0.00 (e) 0.10 0.23 0.03
Net realized and unrealized gain (loss).......... 2.39 5.46 1.85 (0.59)
---------- ---------- ---------- ----------
Total from investment operations................. 2.39 5.56 2.08 (0.56)
---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income............................ -- (0.27) (0.04) --
Net realized gain................................ (1.13) (0.10) -- --
---------- ---------- ---------- ----------
Total distributions.............................. (1.13) (0.37) (0.04) --
---------- ---------- ---------- ----------
Net asset value, end of period................... $ 28.03 $ 26.77 $ 21.58 $ 19.54
========== ========== ========== ==========
TOTAL RETURN (c)................................. 9.23% 26.16% 10.61% (2.79)%
========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............. $ 1,144 $ 1,288 $ 651 $ 218
Ratio of total expenses to average net assets ... 8.65% 11.29% 23.94% 60.42% (d)
Ratio of net expenses to average net assets ..... 1.60% 1.60% 1.60% 1.60% (d)
Ratio of net investment income (loss) to average
net assets.................................... 0.00% (f) 0.42% 1.10% 0.26% (d)
Portfolio turnover rate.......................... 39% 31% 11% 21%
(a) Class A Shares commenced operations on February 24, 2011.
(b) Per share amounts have been calculated using the average shares method.
(c) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge of 5.50% or contingent
deferred sales charge (CDSC). On purchases of $1 million or more, a CDSC
of 1% may be imposed on certain redemptions made within twelve months of
purchase. If the sales charges were included, total returns would be
lower. These returns include Rule 12b-1 service fees of 0.25% and do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total return would
have been lower if certain fees had not been waived and expenses
reimbursed by the investment advisor. Total return is calculated for the
time period presented and is not annualized for periods less than one
year.
(d) Annualized.
(e) Amount is less than $0.01
(f) Amount is less than 0.01%
Page 12 See Notes to Financial Statements
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
CLASS C SHARES 10/31/2014 10/31/2013 10/31/2012 10/31/2011 (a)
------------ ------------ ------------ --------------
Net asset value, beginning of period............. $ 25.51 $ 20.59 $ 18.81 $ 20.10
---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (b)................. (0.19) (0.10) 0.05 (0.07)
Net realized and unrealized gain (loss).......... 2.25 5.23 1.73 (1.22)
---------- ---------- ---------- ----------
Total from investment operations................. 2.06 5.13 1.78 (1.29)
---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income............................ -- (0.11) -- --
Net realized gain................................ (1.13) (0.10) -- --
---------- ---------- ---------- ----------
Total distributions.............................. (1.13) (0.21) -- --
---------- ---------- ---------- ----------
Net asset value, end of period................... $ 26.44 $ 25.51 $ 20.59 $ 18.81
========== ========== ========== ==========
TOTAL RETURN (c)................................. 8.36% 25.11% 9.46% (6.42)%
========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............. $ 1,977 $ 1,956 $ 615 $ 8
Ratio of total expenses to average net assets ... 8.81% 10.45% 26.69% 98.09% (d)
Ratio of net expenses to average net assets ..... 2.35% 2.35% 2.35% 2.35% (d)
Ratio of net investment income (loss) to average
net assets.................................... (0.73)% (0.43)% 0.25% (0.54)% (d)
Portfolio turnover rate.......................... 39% 31% 11% 21%
(a) Class C Shares commenced operations on March 2, 2011.
(b) Per share amounts have been calculated using the average shares method.
(c) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 1%, charged on certain redemptions
made within one year of purchase. If the sales charge was included, total
return would be lower. These returns include combined Rule 12b-1
distribution and service fees of 1% and do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption
of Fund shares. The total return would have been lower if certain fees had
not been waived and expenses reimbursed by the investment advisor. Total
return is calculated for the time period presented and is not annualized
for periods less than one year.
(d) Annualized.
See Notes to Financial Statements Page 13
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
CLASS I SHARES 10/31/2014 10/31/2013 10/31/2012 10/31/2011 (a)
------------ ------------ ------------ --------------
Net asset value, beginning of period............. $ 27.15 $ 21.81 $ 19.58 $ 20.00
---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (b)................. 0.08 0.16 0.26 0.07
Net realized and unrealized gain (loss).......... 2.42 5.60 2.05 (0.49)
---------- ---------- ---------- ----------
Total from investment operations................. 2.50 5.76 2.31 (0.42)
---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income............................ -- (0.32) (0.08) --
Net realized gains............................... (1.13) (0.10) -- --
---------- ---------- ---------- ----------
Total distributions.............................. (1.13) (0.42) (0.08) --
---------- ---------- ---------- ----------
Net asset value, end of period................... $ 28.52 $ 27.15 $ 21.81 $ 19.58
========== ========== ========== ==========
TOTAL RETURN (c)................................. 9.51% 26.85% 11.85% (2.10)%
========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............. $ 592 $ 276 $ 141 $ 164
Ratio of total expenses to average net assets ... 11.05% 17.52% 41.80% 103.62% (d)
Ratio of net expenses to average net assets ..... 1.35% 1.35% 1.35% 1.35% (d)
Ratio of net investment income (loss) to average
net assets.................................... 0.28% 0.66% 1.28% 0.43% (d)
Portfolio turnover rate.......................... 39% 31% 11% 21%
(a) Class I Shares were initially seeded on December 16, 2010 and commenced
operations on January 11, 2011.
(b) Per share amounts have been calculated using the average shares method.
(c) Assumes reinvestment of all distributions for the period. These returns do
not reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total return would
have been lower if certain fees had not been waived and expenses
reimbursed by the investment advisor. Total return is calculated for the
time period presented and is not annualized for periods less than one
year.
(d) Annualized.
Page 14 See Notes to Financial Statements
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
CLASS R3 SHARES 10/31/2014 10/31/2013 10/31/2012 10/31/2011 (a)
------------ ------------ ------------ --------------
Net asset value, beginning of period............. $ 26.08 $ 21.04 $ 19.03 $ 20.10
---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (b)................. (0.06) 0.06 0.15 (0.04)
Net realized and unrealized gain (loss).......... 2.28 5.29 1.86 (1.03)
---------- ---------- ---------- ----------
Total from investment operations................. 2.22 5.35 2.01 (1.07)
---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income............................ -- (0.21) -- --
Net realized gain................................ (1.13) (0.10) -- --
---------- ---------- ---------- ----------
Total distributions.............................. (1.13) (0.31) -- --
---------- ---------- ---------- ----------
Net asset value, end of period................... $ 27.17 $ 26.08 $ 21.04 $ 19.03
========== ========== ========== ==========
TOTAL RETURN (c)................................. 8.81% 25.75% 10.56% (5.32)%
========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............. $ 1 $ 1 $ 1 $ 1
Ratio of total expenses to average net assets ... 1,481.17% 1,640.13% 2,717.44% 297.34% (d)
Ratio of net expenses to average net assets ..... 1.85% 1.85% 1.88% 2.10% (d)
Ratio of net investment income (loss) to average
net assets.................................... (0.24)% 0.24% 0.75% (0.32)% (d)
Portfolio turnover rate.......................... 39% 31% 11% 21%
(a) Class R3 Shares were initially seeded and commenced operations on March 2,
2011.
(b) Per share amounts have been calculated using the average shares method.
(c) Assumes reinvestment of all distributions for the period. These returns
include combined Rule 12b-1 distribution and service fees of 0.50%
effective December 15, 2011 and 0.75% prior to December 15, 2011 and do
not reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total return would
have been lower if certain fees had not been waived and expenses
reimbursed by the investment advisor. Total return is calculated for the
time period presented and is not annualized for periods less than one
year.
(d) Annualized.
See Notes to Financial Statements Page 15
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2014
1. ORGANIZATION
First Trust/Confluence Small Cap Value Fund (the "Fund") is a series of the
First Trust Series Fund (the "Trust"), a Massachusetts business trust organized
on July 9, 2010, and is registered as a diversified open-end management
investment company with the Securities and Exchange Commission ("SEC") under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund offers
four classes of shares: Class A, Class C, Class I and Class R3. Each class
represents an interest in the same portfolio of investments but with a different
combination of sales charges, distribution and service (12b-1) fees, eligibility
requirements and other features.
The Fund's investment objective is to seek to provide long-term capital
appreciation. The Fund seeks to achieve its investment objective by investing,
under normal market conditions, at least 80% of its net assets (including
investment borrowings, if any) in equity securities of U.S. listed companies
with small market capitalizations at the time of investment that Confluence
Investment Management LLC ("Confluence" or the "Sub-Advisor") believes have
produced solid returns over extended periods of time. There can be no assurance
that the Fund will achieve its investment objective. The Fund may not be
appropriate for all investors.
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 ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of each class of shares of the Fund is determined
daily as of the close of regular trading on the New York Stock Exchange
("NYSE"), normally 4:00 p.m. Eastern time, on each day the NYSE is open for
trading. If the NYSE closes early on a valuation day, the NAV is determined as
of that time. The NAV for each class is calculated by dividing the value of the
Fund's total assets attributable to such class (including accrued interest and
dividends), less all liabilities attributable to such class (including accrued
expenses, dividends declared but unpaid and any borrowings of the Fund), by the
total number of shares of the class outstanding. Differences in NAV of each
class of the Fund's shares are generally expected to be due to the daily expense
accruals of the specified distribution and service (12b-1) fees and transfer
agency costs applicable to such class of shares and the resulting differential
in the dividends that may be paid on each class of shares.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e. a regulated market) and are primarily obtained from third
party pricing services. Fair value prices represent any prices not considered
market value prices and are either obtained from a third party pricing service
or are determined by the Pricing Committee of the Fund's investment advisor,
First Trust Advisors L.P. ("First Trust" or the "Advisor") in accordance with
valuation procedures adopted by the Trust's Board of Trustees, and in accordance
with provisions of the 1940 Act. Investments valued by the Advisor's Pricing
Committee, if any, are footnoted as such in the footnotes to the Portfolio of
Investments. The Fund's investments are valued as follows:
Common stocks and other securities listed on any national or foreign
exchange (excluding the NASDAQ Stock Market LLC ("NASDAQ") and the London
Stock Exchange Alternative Investment Market ("AIM")) are valued at the
last sale price on the exchange on which they are principally traded or,
for NASDAQ and AIM securities, the official closing price. Securities
traded on more than one securities exchange are valued at the last sale
price or official closing price, as applicable, at the close of the
securities exchange representing the principal market for such securities.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Trust's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose
market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's fair value. As a general
principle, the current fair value of a security would appear to be the amount
which the owner might reasonably expect to receive for the security upon its
current sale. When fair value prices are used, generally they will differ from
market quotations or official closing prices on the applicable exchange. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the type of security;
2) the size of the holding;
Page 16
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2014
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might affect
the value of the security.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodology used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of October 31, 2014, 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 daily on the accrual basis, including the amortization of premiums and
the accretion of discounts. Income is allocated on a pro rata basis to each
class of shares.
The Fund may hold shares of business development companies ("BDCs"). The tax
character of distributions received from these securities may vary when reported
by the issuer after its tax reporting period concludes.
The Fund may hold the securities of real estate investment trusts ("REITs").
Distributions from such investments may be comprised of return of capital,
capital gains and income. The actual character of amounts received during the
year is not known until after the REIT's fiscal year end. The Fund records the
character of distributions received from REITs during the year based on
estimates available. The characterization of distributions received by the Fund
may be subsequently revised based on information received from the REITs after
their tax reporting periods conclude.
C. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
The Fund will distribute to holders of its shares semi-annual dividends of all
or a portion of its net income. Distributions of any net capital gains earned by
the Fund will be distributed at least annually. Distributions will automatically
be reinvested into additional Fund shares unless cash distributions are elected
by the shareholder.
Distributions from net investment income and realized capital gains are
determined in accordance with income tax regulations, which may differ from U.S.
GAAP. Certain capital accounts in the financial statements are periodically
adjusted for permanent differences in order to reflect their tax character.
These permanent differences are primarily due to the varying treatment of income
and gain/loss on portfolio securities held by the Fund and have no impact on net
assets or NAV per share. Temporary differences, which arise from recognizing
certain items of income, expense and gain/loss in different periods for
financial statement and tax purposes, will reverse at some point in the future.
Permanent differences incurred during the year ended October 31, 2014, resulting
in book and tax accounting differences, have been reclassified at year end to
reflect an increase in accumulated net investment income (loss) of $23,517 and a
decrease in accumulated net realized gain (loss) on investments of $23,517. Net
assets were not affected by this reclassification.
Page 17
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2014
The tax character of distributions paid during the fiscal year ended October 31,
2014 and 2013 was as follows:
Distributions paid from: 2014 2013
Ordinary income............................... $ 42,149 $ 15,424
Capital gain.................................. 113,369 5,563
Return of capital............................. -- --
As of October 31, 2014, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income................. $ 99,019
Undistributed capital gains................... 160,304
------------
Total undistributed earnings.................. 259,323
Accumulated capital and other losses.......... --
Net unrealized appreciation (depreciation).... 493,437
------------
Total accumulated earnings (losses)........... 752,760
Other......................................... --
Paid-in capital............................... 2,962,048
------------
Net assets.................................... $ 3,714,808
============
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. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
The Fund intends to utilize provisions of the federal income tax laws, which
allows it to carry realized capital loss forward indefinitely following the year
of the loss and offset such loss against any future realized capital gains. The
Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At October 31, 2014, the
Fund had no non-expiring capital loss carryforwards for federal income tax
purposes.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ended 2011, 2012,
2013 and 2014 remain open to federal and state audit. As of October 31, 2014,
management has evaluated the application of these standards to the Fund and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
E. EXPENSES:
The Fund will pay all expenses directly related to its operations. Expenses of
the Fund are allocated on a pro rata basis to each class of shares, except for
distribution and service (12b-1) fees and incremental transfer agency costs
which are unique to each class of shares.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 1.00% of the Fund's average daily net assets.
First Trust also provides fund reporting services to the Fund for a flat annual
fee in the amount of $9,250.
Confluence serves as the Fund's sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor is entitled to receive a
portfolio management fee at an annual rate of 0.50% of the Fund's average daily
net assets that is paid by First Trust from its investment advisory fee.
First Trust and Confluence have agreed to waive fees and/or pay Fund expenses to
the extent necessary to prevent the annual operating expenses of the Fund
(excluding 12b-1 distribution and service fees, interest expenses, taxes,
acquired fund fees and expenses, fees incurred in acquiring and disposing of
portfolio securities and extraordinary expenses) from exceeding 1.35% of average
daily net assets of any class of shares of the Fund (the "Expense Cap") until
February 28, 2016 and then will not exceed 1.70% from March 1, 2016 to February
28, 2025 (the "Expense Cap Termination Date"). Expenses borne and fees waived by
First Trust and Confluence are subject to recovery by First Trust and Confluence
up to three years from the date the fee or expense was incurred, but no
reimbursement payment will be made by the Fund at any time if it would result in
the Fund's expenses exceeding the Expense Cap in place at the time the expense
Page 18
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2014
was borne or the fee was waived by First Trust and Confluence. These amounts
would be included in "Expenses previously waived or reimbursed" on the Statement
of Operations. The advisory fee waivers and expense reimbursement for the year
ended October 31, 2014 and the expenses borne by First Trust and Confluence
subject to recovery were as follows:
EXPENSES SUBJECT TO RECOVERY
------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
ADVISORY EXPENSE OCTOBER 31, OCTOBER 31, OCTOBER 31,
FEE WAIVER REIMBURSEMENT 2012 2013 2014 TOTAL
------------ ------------ ------------ ------------ ------------ ------------
$ 37,591 $ 246,318 $ 273,946 $ 236,557 $ 283,909 $ 794,412
Brown Brothers Harriman & Co. ("BBH") serves as the Fund's administrator, fund
accountant and custodian in accordance with certain fee arrangements. As
administrator and fund accountant, BBH is responsible for providing certain
administrative and accounting services to the Fund, including maintaining the
Fund's books of account, records of the Fund's securities transactions, and
certain other books and records. As custodian, BBH is responsible for custody of
the Fund's assets.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
transfer agent in accordance with certain fee arrangements. As transfer agent,
BNYM IS is responsible for maintaining shareholder records for the Fund.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated pro rata among each fund in the First Trust Fund
Complex based on net assets. Each Independent Trustee is also paid an annual per
fund fee that varies based on whether the fund is a closed-end or other actively
managed fund, or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Trustees are reimbursed for travel and out-of-pocket expenses in connection with
all meetings. The Lead Independent Trustee and Committee Chairmen rotate every
three years. The officers and "Interested" Trustee receive no compensation from
the Trust for acting in such capacities.
4. CAPITAL SHARE TRANSACTIONS
Capital transactions were as follows:
YEAR ENDED YEAR ENDED
OCTOBER 31, 2014 OCTOBER 31, 2013
SHARES VALUE SHARES VALUE
---------- ------------- ---------- -------------
Sales:
Class A 11,125 $ 296,008 22,009 $ 552,388
Class C 7,955 200,103 46,487 1,044,546
Class I 11,0912 95,796 6,014 143,938
Class R3 -- -- -- --
---------- ------------- ---------- -------------
Total Sales: 30,171 $ 791,907 74,510 $ 1,740,872
========== ============= ========== =============
Dividend Reinvestment:
Class A 1,560 $ 40,885 258 $ 5,651
Class C 3,327 82,837 358 7,523
Class I 381 10,154 44 960
Class R3 -- -- -- --
---------- ------------- ---------- -------------
Total Dividend Reinvestment: 5,268 $ 133,876 660 $ 14,134
========== ============= ========== =============
Redemptions:
Class A (19,967) $ (534,713) (4,340) $ (96,585)
Class C (13,160) (336,696) (59) (1,401)
Class I (865) (23,402) (2,357) (55,258)
Class R3 -- -- -- --
---------- ------------- ---------- -------------
Total Redemptions: (33,992) $ (894,811) (6,756) $ (153,244)
========== ============= ========== =============
Page 19
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2014
5. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investments, excluding short-term
investments, for the year ended October 31, 2014, were $1,434,060 and
$1,377,808, respectively.
6. BORROWINGS
Effective March 28, 2013, the Trust and First Trust Variable Insurance Trust
entered into a $20 million Committed Line of Credit ("Line of Credit") with The
Bank of Nova Scotia ("Scotia") to be a liquidity backstop during periods of high
redemption volume. On July 30, 2013, the Line of Credit was increased to $50
million and First Trust Exchange-Traded Fund III and First Trust Exchange-Traded
Fund IV were added to the Credit Agreement. A commitment fee of 0.125% of the
daily amount of the excess of the commitment amount over the outstanding
principal balance of the loans was charged by Scotia, which First Trust
allocated amongst the funds that had access to the Line of Credit. To the extent
that the Fund accessed the Line of Credit, there would also be an interest fee
charged.
The Line of Credit terminated on April 25, 2014. Effective April 25, 2014, the
Trust, First Trust Exchange-Traded Fund III and First Trust Exchange-Traded Fund
IV entered into an $80 million Credit Agreement with Scotia as administrative
agent for a group of lenders. A commitment fee of 0.125% of the daily amount of
the excess of the commitment amount over the outstanding principal balance of
the loans is charged by Scotia, which First Trust allocates amongst the funds
that have access to the credit line. To the extent that the Fund accesses the
credit line, there would also be an interest fee charged. The Fund did not have
any borrowings outstanding during the year ended October 31, 2014.
7. DISTRIBUTION AND SERVICE PLAN
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the share
classes of the Fund are authorized to pay an amount up to 0.25%, 1.00% and 0.50%
of their average daily net assets each year for Class A, Class C and Class R3,
respectively, to reimburse First Trust Portfolios L.P. ("FTP"), the distributor
of the Fund, for amounts expended to finance activities primarily intended to
result in the sale of Fund shares or the provision of investor services. FTP may
also use this amount to compensate securities dealers or other persons for
providing distribution assistance, including broker-dealer and shareholder
support and educational and promotional services.
8. 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.
9. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there
were no subsequent events requiring recognition or disclosure in the financial
statements that have not already been disclosed.
Page 20
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST/CONFLUENCE SMALL CAP
VALUE FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust/Confluence Small Cap Value Fund (the "Fund"), a series of the First Trust
Series Fund, including the portfolio of investments, as of October 31, 2014, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
The Fund is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of October 31, 2014 by correspondence with the Fund's
custodian. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Trust/Confluence Small Cap Value Fund as of October 31, 2014, and the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the financial highlights for each
of the periods presented, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
December 23, 2014
Page 21
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2014 (UNAUDITED)
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Trust uses to determine
how to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's website at http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's 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.
TAX INFORMATION
The Fund hereby designates as qualified dividend income 44.90% of its ordinary
income distributions (including short-term capital gains, if applicable) for the
period ended October 31, 2014. 42.08% of the ordinary income (including
short-term capital gain, if applicable) distributions made by the Fund during
the period ended October 31, 2014, qualify for corporate dividends received
deduction available to corporate shareholders.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some, but not all,
of the risks that should be considered for the Fund. For additional information
about the risks associated with investing in the Fund, please see the Fund's
prospectus and statement of additional information, as well as other Fund
regulatory filings.
MARKET RISK: Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory
or market developments, changes in interest rates and perceived trends in stock
prices. Overall stock values could decline generally or could underperform other
investments. Companies with smaller market capitalizations are generally subject
to additional market risk.
MARKET CAPITALIZATION RISK: The Fund normally invests at least 80% of its assets
in Small-Cap Companies. Because the market capitalization is measured at the
time of its initial purchase, the Fund will not be forced to sell a stock
because the stock has exceeded or fallen below the market capitalization range.
Because of market movement, there can be no assurance that the securities held
by the Fund will stay within the given market capitalization range. As a result,
the Fund may be exposed to additional risk or investors may not be given the
opportunity to invest fully in a certain market capitalization range.
SMALL CAP RISK: The Fund invests in Small-Cap Companies. Such companies may be
more vulnerable to adverse general market or economic developments, and their
securities may be less liquid and may experience greater price volatility than
larger, more established companies as a result of several factors, including
limited trading volumes, products or financial resources, management
inexperience and dependence on a few key people, and less publicly available
information. Accordingly, such companies are generally subject to greater market
risk than larger, more established companies. The market movements of equity
securities issued by issuers with smaller capitalizations may be more abrupt or
erratic than the market movements of equity securities of larger, more
established companies or the stock market in general. Historically, smaller
capitalization companies have sometimes gone through extended periods when they
did not perform as well as larger companies. In addition, equity securities of
smaller capitalization companies may be less liquid than those of larger
companies.
VALUE INVESTING RISK: The Fund focuses its investments on securities that the
portfolio manager believes are undervalued or inexpensive relative to other
investments. These types of securities may present risks in addition to the
general risks associated with investing in them. These securities generally are
selected on the basis of an issuer's business and economic fundamentals or the
securities' current and projected credit profiles, relative to current market
price. Such securities are subject to the risk of misestimating certain
fundamental factors. Disciplined adherence to a "value" investment mandate
during periods in which that style is "out of favor" can result in significant
underperformance relative to overall market indices and other managed investment
vehicles that pursue growth style investments and/or flexible style mandates.
REAL ESTATE INVESTMENT RISK: The Fund invests in companies in the real estate
industry, including REITs. Therefore, the Fund is subject to the risks
associated with investing in real estate, which may include, but are not limited
to, fluctuations in the value of underlying properties; defaults by borrowers or
tenants; market saturation; changes in general and local economic conditions;
decreases in market rates for rents; increases in competition, property taxes,
capital expenditures or operating expenses; and other economic, political or
regulatory occurrences affecting companies in the real estate industry.
Page 22
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2014 (UNAUDITED)
REIT RISK: REITs are subject to risks related to their structure and focus,
which include, but are not limited to, dependency upon management skills,
limited diversification, the risks of locating and managing financing for
projects, heavy cash flow dependency, possible default by borrowers, the costs
and potential losses of self-liquidation of one or more holdings, the risk of a
possible lack of mortgage funds and associated interest rate risks,
overbuilding, property vacancies, increases in property taxes and operating
expenses, changes in zoning laws, losses due to environmental damages, changes
in neighborhood values and appeal to purchases, the possibility of failing to
maintain exemptions from registration under the 1940 Act, and, in many cases,
relatively small market capitalization, which may result in less market
liquidity and greater price volatility. Fund shareholders indirectly pay REIT
fees and expenses.
BDC RISK: The Fund may invest in BDCs which may carry risks similar to those of
a private equity or venture capital fund. BDCs are not redeemable at the option
of the shareholder and they may trade in the market at a discount to their net
asset value. The BDCs included in the Fund may employ the use of leverage in its
portfolio through borrowings or the issuance of preferred stock. While leverage
often serves to increase the yield of a BDC, this leverage also subjects a BDC
to increased risks, including the likelihood of increased volatility and the
possibility that a BDC's common share income will fall if the dividend rate of
the preferred shares or the interest rate on any borrowings rises.
INDUSTRIALS AND PRODUCER DURABLES SECTOR RISK: The Fund invests in the
securities of companies in the industrials and producer durables sectors. Many
companies in these sectors convert unfinished goods into finished durables used
to manufacture other goods or provide services. Some industries included in
these sectors are electrical equipment and components, industrial products,
manufactured housing and telecommunications equipment. General risks of these
companies include the general state of the economy, intense competition,
consolidation, domestic and international politics, excess capacity and consumer
demand and spending trends. In addition, they may also be significantly affected
by overall capital spending levels, economic cycles, technical obsolescence,
delays in modernization, labor relations, government regulations and e-commerce
initiatives.
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING APPROVAL OF CONTINUATION OF INVESTMENT MANAGEMENT
AGREEMENT AND SUB-ADVISORY AGREEMENT
The Board of Trustees of the First Trust Series Fund (the "Trust"), including
the Independent Trustees, unanimously approved the continuation of the
Investment Management Agreement (the "Advisory Agreement") between the Trust, on
behalf of the First Trust/Confluence Small Cap Value Fund (the "Fund"), and
First Trust Advisors L.P. (the "Advisor" or "First Trust") and the Investment
Sub Advisory Agreement (the "Sub Advisory Agreement" and together with the
Advisory Agreement, the "Agreements") among the Trust, on behalf of the Fund,
the Advisor and Confluence Investment Management LLC (the "Sub-Advisor"), at a
meeting held on June 8-9, 2014. The Board of Trustees determined that the
continuation of the Agreements is in the best interests of the Fund in light of
the extent and quality of the services provided and such other matters as the
Board considered to be relevant in the exercise of its reasonable business
judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. 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 its affiliate, First Trust
Portfolios L.P. ("FTP"), and to the Sub-Advisor; and information on the
Advisor's and the Sub-Advisor's compliance programs. Following receipt of this
information, counsel to the Independent Trustees posed follow-up questions to
the Advisor, and the Independent Trustees and their counsel met separately to
discuss the information provided by the Advisor and the Sub Advisor, including
the supplemental responses. The Board applied its business judgment to determine
whether the arrangements between the Trust and the Advisor and among the Trust,
the Advisor and the Sub-Advisor are reasonable business arrangements from the
Fund's perspective as well as from the perspective of shareholders. The Board
considered that shareholders chose to invest or remain invested in the Fund
knowing that the Advisor and the Sub-Advisor manage the Fund.
In reviewing the Agreements, the Board considered the nature, extent and quality
of services provided by the Advisor and the Sub-Advisor under the Agreements.
The Board considered the Advisor's statements regarding the incremental benefits
associated with the Fund's advisor/sub-advisor management structure. With
respect to the Advisory Agreement, the Board considered that the Advisor is
responsible for the overall management and administration of the Fund and
reviewed the services provided by the Advisor to the Fund, including the
oversight of the Sub-Advisor. The Board noted the compliance program that had
been developed by the Advisor and considered that it includes a robust program
for monitoring the Sub-Advisor's compliance with the 1940 Act and the Fund's
Page 23
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2014 (UNAUDITED)
investment objective and policies. With respect to the Sub-Advisory Agreement,
the Board noted the background and experience of the Sub-Advisor's portfolio
management team. At the meeting, the Board received a presentation from
representatives of the Sub Advisor discussing the services that the Sub-Advisor
provides to the Fund and how the Sub-Advisor manages the Fund's investments. The
Sub-Advisor's representatives also discussed the Fund's relative
underperformance over recent periods, noting that the market environment favored
growth and momentum investors as opposed to long-term value-oriented investors
like the Sub-Advisor. The Sub-Advisor's representatives noted the Fund's
positive absolute performance over the same periods. In light of the information
presented and the considerations made, the Board concluded that the nature,
extent and quality of services provided to the Fund by the Advisor and the
Sub-Advisor under the Agreements have been and are expected to remain
satisfactory and that the Sub-Advisor, under the oversight of the Advisor, has
managed the Fund consistent with its investment objective and policies.
The Board considered the advisory and sub-advisory fees paid under the
Agreements. The Board considered the advisory fees charged by the Advisor to
similar funds and other non-fund clients, noting that the Advisor does not
provide advisory services to other funds that have investment objectives and
policies similar to the Fund's, but does provide services to certain separately
managed accounts that may have investment objectives and policies similar to the
Fund's. The Board noted that the Advisor charges a lower advisory fee rate to
the separately managed accounts, as well as the Advisor's statement that the
nature of the services provided to the separately managed accounts is not
comparable to those provided to the Fund. The Board considered the sub-advisory
fee and how it relates to the Fund's overall advisory fee structure and noted
that the sub-advisory fee is paid by the Advisor from its advisory fee. The
Board also considered information provided by the Sub-Advisor as to the fees it
charges to other clients, noting that the Sub-Advisor does not charge a lower
fee to any other client for which it provides comparable services. In addition,
the Board reviewed data prepared by Lipper Inc. ("Lipper"), an independent
source, showing the advisory fees and expense ratios of the Fund as compared to
the advisory fees and expense ratios of an expense peer group selected by Lipper
and similar data from the Advisor for a separate peer group selected by the
Advisor. The Board noted that the Lipper and Advisor peer groups did not include
any overlapping peer funds. The Board discussed with representatives of the
Advisor the limitations in creating a relevant peer group for the Fund,
including that (i) most of the peer funds are larger than the Fund, some
significantly so, which causes the Fund's fixed expenses to be higher on a
percentage basis as compared to the larger peer funds and (ii) most peer funds
do not employ an advisor/sub-advisor management structure. The Board took these
limitations into account in considering the peer data. In reviewing the peer
data, the Board noted that the Fund's contractual advisory fee was equal to the
median of the Lipper peer group. The Board considered that the Advisor and
Sub-Advisor agreed to waive fees and/or pay Fund expenses through February 28,
2016 to the extent necessary to prevent the annual operating expenses of the
Fund (excluding taxes, interest, all brokerage commissions, other normal charges
incident to the purchase and sale of portfolio securities, distribution and
service fees payable pursuant to a Rule 12b-1 plan, if any, and extraordinary
expenses) from exceeding 1.35% of a class' average daily net assets, and from
March 1, 2016 through February 28, 2025 to the extent necessary to prevent
annual operating expenses (with the same exclusions) from exceeding 1.70% of a
class' average daily net assets. The Board noted that fees waived or expenses
borne by the Advisor and Sub-Advisor are subject to reimbursement by the Fund
for up to three years from the date the fees were waived or expense was
incurred, but no reimbursement payment would be made by the Fund if it would
result in the Fund exceeding an expense ratio equal to the expense cap in place
at the time the fees were waived or the expenses were borne by the Advisor and
Sub-Advisor.
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 and portfolio risk on an ongoing basis. 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 reviewed
data prepared by Lipper comparing the Fund's performance (based on Class A
shares) for the one-year and since-inception periods ended December 31, 2013 to
a performance peer universe selected by Lipper and to two benchmarks. In
reviewing the Fund's performance as compared to the performance of the Lipper
performance peer universe, the Board took into account the limitations described
above with respect to creating a relevant peer group for the Fund. The Board
also considered the Fund's dividend yield as of March 31, 2014. Based on the
information presented, the Board noted that the Fund's performance was below the
median of the Lipper peer universe for the one-year and since-inception periods
ended December 31, 2013, and considered the Advisor's and the Sub-Advisor's
explanations for that performance.
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, extent and quality
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 noted the Advisor's statement that
economies of scale in providing services to the Fund are not available at
current asset levels. The Board also considered the costs of the services
provided and any profits realized by the Advisor from serving as investment
advisor to the Fund for the twelve months ended December 31, 2013, as well as
product-line profitability data for the same period, as set forth in the
materials provided to the Board. The Board noted the inherent limitations in the
profitability analysis, and considered that the Advisor estimated that the Fund
was not profitable for the Advisor. In addition, the Board considered fall-out
benefits described by the Advisor that may be realized from its relationship
with the Fund. The Board noted that in addition to the advisory fees paid by the
Fund, FTP is compensated for services provided to the Fund through 12b-1 fees
and that First Trust also is compensated for providing fund reporting services
to the Fund.
Page 24
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2014 (UNAUDITED)
The Board noted the Sub-Advisor did not identify any economies of scale in
providing services to the Fund at current asset levels but indicated that some
economies of scale may exist at larger asset levels. The Board considered that
the sub advisory fee rate was negotiated at arm's length between the Advisor and
the Sub-Advisor, an unaffiliated third party. The Board considered the
Sub-Advisor's statement that it had negative net fees in sub-advising the Fund
in 2013 as a result of fee waivers and expense reimbursements, but that the
Sub-Advisor's representatives stated at the meeting that the Sub-Advisor is
committed to serving as Sub-Advisor to the Fund. The Board considered fall-out
benefits realized by the Sub-Advisor from its relationship with the Fund,
including the Sub-Advisor's statement that it benefits from greater exposure to
small cap value companies. The Board noted that the Sub-Advisor does not
maintain any soft-dollar arrangements for the Fund.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreements continue to be fair and reasonable and that the continuation
of the Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 25
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2014 (UNAUDITED)
The Trust's statement of additional information includes additional information
about the Trustees and is available, without charge, upon request, by calling
(800) 988-5891.
NUMBER OF OTHER
PORTFOLIOS IN TRUSTEESHIPS OR
THE FIRST TRUST DIRECTORSHIPS
NAME, ADDRESS, TERM OF OFFICE FUND COMPLEX HELD BY TRUSTEE
DATE OF BIRTH AND AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE TRUST SERVICE DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Indefinite Term Physician; President, Wheaton Orthopedics; 111 None
c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate
120 East Liberty Drive, o Since Trust Limited Partnership; Member, Sportsmed
Suite 400 Inception LLC
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Indefinite Term President (March 2010 to Present), Senior 111 Director of ADM
c/o First Trust Advisors L.P. Vice President and Chief Financial Officer Investor Services,
120 East Liberty Drive, o Since Trust (May 2007 to March 2010), ADM Investor Inc., ADM
Suite 400 Inception Services, Inc. (Futures Commission Investor Services
Wheaton, IL 60187 Merchant) International, and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Indefinite Term President (2003 to Present), Hibs 111 Director of Trust
c/o First Trust Advisors L.P. Enterprises (Financial and Management Company of
120 East Liberty Drive, o Since Trust Consulting) Illinois
Suite 400 Inception
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Indefinite Term Managing Director and Chief Operating 111 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant
120 East Liberty Drive, o Since Trust Harapan Educational Foundation Transport, Inc.
Suite 400 Inception (Educational Products and Services); (May 2003 to
Wheaton, IL 60187 President and Chief Executive Officer May 2014)
D.O.B.: 03/54 (June 2012 to September 2014), Servant
Interactive LLC (Educational Products and
Services); President and Chief Executive
Officer (June 2012 to September 2014), Dew
Learning LLC (Educational Products and
Services); President (June 2002 to June 2012),
Covenant College
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee, o Indefinite Term Chief Executive Officer (December 2010 to 111 None
Chairman of the Board Present), President (until December 2010),
120 East Liberty Drive, o Since Trust First Trust Advisors L.P. and First Trust
Suite 400 Inception Portfolios L.P.; Chairman of the Board of
Wheaton, IL 60187 Directors, BondWave LLC (Software
D.O.B.: 09/55 Development Company/Investment Advisor
and Stonebridge Advisors LLC (Investment
Advisor)
-------------------
(1) Mr. Bowen is deemed an "interested person" of the Trust due to his
position as Chief Executive Officer of First Trust Advisors L.P.,
investment advisor of the Trust.
Page 26
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2014 (UNAUDITED)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH TRUST LENGTH OF SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(2)
------------------------------------------------------------------------------------------------------------------------------------
Mark R. Bradley President and Chief o Indefinite Term Chief Operating Officer (December 2010 to Present)
120 E. Liberty Drive, Executive Officer and Chief Financial Officer, First Trust Advisors
Suite 400 o Since January 2012 L.P. and First Trust Portfolios L.P.; Chief Financial
Wheaton, IL 60187 Officer, BondWave LLC (Software Development
D.O.B.: 11/57 Company/Investment Advisor) and Stonebridge
Advisors LLC (Investment Advisor)
James M. Dykas Treasurer, Chief Financial o Indefinite Term Controller (January 2011 to Present), Senior Vice
120 E. Liberty Drive, Officer and Chief President (April 2007 to Present), First Trust
Suite 400 Accounting Officer o Since January 2012 Advisors L.P. and First Trust Portfolios L.P.
Wheaton, IL 60187
D.O.B.: 01/66
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P. and First
120 E. Liberty Drive, Legal Officer Trust Portfolios L.P.; Secretary and General Counsel,
Suite 400 o Since Trust Inception BondWave LLC (Software Development Company/Investment
Wheaton, IL 60187 Advisor) and Stonebridge Advisors LLC
D.O.B.: 05/60 (Investment Advisor)
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present), Senior
120 E. Liberty Drive, Vice President (September 2005 to July 2012),
Suite 400 o Since Trust Inception First Trust Advisirs L.P. and First Trust Portfolios
Wheaton, IL 60187 L.P.
D.O.B.: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust Advisors
120 E. Liberty Drive, and Assistant Secretary L.P. and First Trust Portfolios L.P.
Suite 400 o Chief Compliance
Wheaton, IL 60187 Officer since January
D.O.B.: 12/66 2011
o Assistant Secretary
since Trust Inception
-------------------
(2) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 27
--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2014 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and considers your privacy an
important priority in maintaining that relationship. We are committed to
protecting the security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies".
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information within First Trust.
PRIVACY ONLINE
We allow third-party companies, including AddThis (a social media sharing
service), to collect certain anonymous information when you visit our website.
These companies may use non-personally identifiable information during your
visits to this and other websites in order to provide advertisements about goods
and services likely to be of greater interest to you. These companies typically
use a cookie, third party web beacon or pixel tags, to collect this information.
To learn more about this behavioral advertising practice, you can visit
www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, First Trust restricts access to
your nonpublic personal information to those First Trust employees who need to
know that information to provide products or services to you. We maintain
physical, electronic and procedural safeguards to protect your nonpublic
personal information.
Policy Updates and Inquiries
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
Page 28
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Confluence Investment Management LLC
20 Allen Avenue, Suite 300
Saint Louis, MO 63119
ADMINISTRATOR,
FUND ACCOUNTANT &
CUSTODIAN
Brown Brothers Harriman & Co.
50 Post Office Square
Boston, MA 02110
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
FIRST TRUST
First Trust Short Duration
High Income Fund
-----------------------------------------
Annual Report
For the Year Ended October 31, 2014
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
ANNUAL REPORT
OCTOBER 31, 2014
Shareholder Letter........................................................... 1
At a Glance.................................................................. 2
Portfolio Commentary......................................................... 4
Understanding Your Fund Expenses............................................. 6
Portfolio of Investments..................................................... 7
Statement of Assets and Liabilities.......................................... 21
Statement of Operations...................................................... 22
Statements of Changes in Net Assets.......................................... 23
Financial Highlights......................................................... 24
Notes to Financial Statements................................................ 27
Report of Independent Registered Public Accounting Firm...................... 33
Additional Information....................................................... 34
Board of Trustees and Officers............................................... 38
Privacy Policy............................................................... 40
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 its 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 Short Duration High 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 its
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 Fund shares
may therefore be less than what you paid for them. Accordingly, you can lose
money by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns and net asset value 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.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
First Trust 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 Fund regulatory filings.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND ANNUAL
LETTER FROM THE CHAIRMAN AND CEO
OCTOBER 31, 2014
Dear Shareholders:
I am pleased to present you with the annual report for your investment in First
Trust Short Duration High Income Fund (the "Fund"). This report provides
detailed information about the Fund, including a performance review and the
financial statements for the past 12 months. I encourage you to read this
document and discuss it with your financial advisor.
Although markets have seemed choppy over the past 12 months, the U.S. has shown
sustained growth over the period. In fact, the S&P 500(R) Index, as measured on
a total return basis, rose 17.27% during the period. First Trust Advisors L.P.
("First Trust") believes that staying invested in quality products through
different types of markets can benefit investors over the long term.
First Trust offers a variety of products that we believe could fit the financial
plans for many investors seeking long-term investment success. We invite you to
look at our investment products with your financial advisor to determine if any
of them might fit your financial goals. We believe that regularly discussing
your financial objectives and investment options with your financial advisor can
help keep you on track.
First Trust will continue to make available up-to-date information about your
investments so you and your financial advisor are current on any First Trust
investments you own. We value our relationship with you, and thank you for the
opportunity to assist you in achieving your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST SHORT DURATION HIGH INCOME FUND
"AT A GLANCE"
AS OF OCTOBER 31, 2014 (UNAUDITED)
-----------------------------------------------------------
FUND STATISTICS
-----------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH NET ASSET
INCOME FUND VALUE (NAV)
-----------------------------------------------------------
Class A (FDHAX) $20.54
Class C (FDHCX) $20.52
Class I (FDHIX) $20.54
-----------------------------------------------------------
-----------------------------------------------------------
% OF TOTAL
CREDIT QUALITY(1) INVESTMENTS
-----------------------------------------------------------
BBB- 0.9%
BB+ 4.2
BB 9.8
BB- 12.2
B+ 22.2
B 23.8
B- 15.1
CCC+ 8.6
CCC 1.7
NR 0.4
Privately rated securities 1.1
-------
Total 100.0%
=======
-----------------------------------------------------------
% OF TOTAL
TOP TEN ISSUERS INVESTMENTS
-----------------------------------------------------------
BMC Software 2.4%
Dell International 2.3
CHS/Community Health Systems, Inc. 2.3
Caesars Growth Partners, LLC 2.2
Charter Communications 2.1
Portillo Restaurant Group 1.8
InVentiv Health, Inc. 1.8
Burger King Corp. 1.6
Numericable 1.5
Sprint Corp. 1.5
-------
Total 19.5%
=======
-----------------------------------------------------------
% OF TOTAL
INDUSTRY CLASSIFICATION INVESTMENTS
-----------------------------------------------------------
Hotels, Restaurants & Leisure 13.2%
Media 11.5
Health Care Providers & Services 8.0
Diversified Telecommunication Services 5.2
Life Sciences Tools & Services 4.9
Software 4.7
Food Products 4.7
Pharmaceuticals 4.3
Oil, Gas & Consumable Fuels 3.3
Food & Staples Retailing 3.3
Wireless Telecommunication Services 2.4
Technology Hardware, Storage & Peripherals 2.3
Auto Components 2.2
Diversified Financial Services 2.1
Chemicals 2.1
Commercial Services & Supplies 2.0
Health Care Equipment & Supplies 1.9
Insurance 1.7
Specialty Retail 1.7
Consumer Finance 1.6
Semiconductors & Semiconductor Equipment 1.6
Containers & Packaging 1.5
Diversified Consumer Services 1.5
Real Estate Management & Development 1.4
Health Care Technology 1.3
Professional Services 1.2
Building Products 1.0
Independent Power and Renewable Electricity
Producers 1.0
IT Services 0.9
Aerospace & Defense 0.9
Real Estate Investment Trusts 0.8
Trading Companies & Distributors 0.7
Road & Rail 0.5
Machinery 0.5
Electronic Equipment & Instruments 0.4
Diversified Business Services 0.4
Industrial Conglomerates 0.4
Electric Utilities 0.4
Personal Products 0.2
Energy Equipment & Services 0.2
Communications Equipment 0.1
-------
Total 100.0%
=======
--------------------------------------------------------------------------------
CLASS CLASS CLASS
DIVIDEND DISTRIBUTIONS A SHARES C SHARES I SHARES
--------------------------------------------------------------------------------
Current Monthly Distribution per Share (2) $0.0587 $0.0459 $0.0630
Current Distribution Rate on NAV (3) 3.43% 2.68% 3.68%
(1) The ratings are by Standard & Poor's. A credit rating is an assessment
provided by a nationally recognized statistical rating organization
(NRSRO) of the creditworthiness of an issuer with respect to debt
obligations. Ratings are measured on a scale that generally ranges from
AAA (highest) to D (lowest). Investment grade is defined as those issuers
that have a long-term credit rating of BBB- or higher. "NR" indicates no
rating. The credit ratings shown relate to the creditworthiness of the
issuers of the underlying securities in the Fund, and not the Fund or its
shares. Credit ratings are subject to change.
(2) Most recent distribution paid or declared through 10/31/2014. Subject to
change in the future.
(3) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
NAV as of 10/31/2014. Subject to change in the future.
NR Not Rated
Page 2
FIRST TRUST SHORT DURATION HIGH INCOME FUND
"AT A GLANCE" (CONTINUED)
AS OF OCTOBER 31, 2014 (UNAUDITED)
-----------------------------------------------------------
PERFORMANCE OF A $10,000 INVESTMENT
-----------------------------------------------------------
This chart compares your Fund's Class I performance to that
of the Bank of America Merrill Lynch U.S. High Yield Master
II Constrained Index, the S&P/LSTA Leveraged Loan Index and
the Blended Index(a) from 11/1/2012 through 10/31/2014.
First Trust Short Bank of America
Duration High Merrill Lynch U.S. High S&P/LSTA
Income Fund - Blended Yield Master II Leveraged Loan
Class I Shares Benchmark (a) Constrained Index ("HUC0") Index ("SPBDAL")
11/1/12 $10,000 $10,000 $10,000 $10,000
4/30/13 10,613 10,548 10,713 10,384
10/31/13 10,811 10,705 10,869 10,542
4/30/14 11,037 11,082 11,386 10,783
10/31/14 11,178 11,198 11,504 10,896
(a) The Blended Index return is a 50/50 split between the Bank of America
Merrill Lynch U.S. High Yield Master II Constrained Index and the S&P/LSTA
Leveraged Loan Index returns.
-----------------------------------------------------------------------------------------------------------------------------
PERFORMANCE AS OF OCTOBER 31, 2014
-----------------------------------------------------------------------------------------------------------------------------
A SHARES C SHARES I SHARES BLENDED
Inception 11/1/2012 Inception 11/1/2012 Inception 11/1/2012 INDEX* HUC0* SPBDAL*
-----------------------------------------------------------------------------------------------------------------------------
W/MAX
1.00%
W/MAX CONTINGENT
W/O 3.50% W/O DEFERRED W/O W/O W/O W/O
AVERAGE SALES SALES SALES SALES SALES SALES SALES SALES
ANNUAL TOTAL RETURNS CHARGES CHARGE CHARGES CHARGE CHARGES CHARGES CHARGES CHARGES
1 Year 3.14% -0.47% 2.38% 1.39% 3.40% 4.61% 5.85% 3.36%
Since Inception 5.49% 3.61% 4.69% 4.69% 5.74% 5.84% 7.27% 4.39%
30-Day SEC Yield(1) 3.96% 3.42% 4.43% N/A N/A N/A
-----------------------------------------------------------------------------------------------------------------------------
* Since inception return is based on inception date of the Fund.
Performance figures assume reinvestment of all dividend distributions and do not
reflect the deduction of taxes that the shareholder would pay on Fund
distributions or the redemption of Fund shares. The total returns would have
been lower if certain fees had not been waived and expenses reimbursed by the
Advisor. An index is a statistical composite that tracks a specific financial
market or sector. Unlike the Fund, the indices do not actually hold a portfolio
of securities and therefore do not incur the expenses incurred by the Fund.
These expenses negatively impact the performance of the Fund. The Fund's past
performance does not predict future performance.
Performance of share classes will vary due to differences in sales charges and
expenses. Total returns with sales charges include payment of the maximum sales
charge of 3.50% for Class A Shares, a contingent deferred sales charge ("CDSC")
of 1.00% for Class C Shares in year one and 12b-1 service fees of 0.25% per year
of average daily net assets for Class A Shares and combined Rule 12b-1
distribution and service fees of up to 1.00% per year of average daily net
assets for Class C Shares. Class I Shares do not have a front-end sales charge
or a CDSC, nor do they pay distribution or service fees.
(1) 30-day SEC yield is calculated by dividing the net investment income per
share earned during the most recent 30-day period by the maximum offering
price per share on the last day of the period. The reported SEC yields are
subsidized. The subsidized yields reflect the fee waiver and/or a
reimbursement of Fund expenses, which has the effect of lowering the
Fund's expense ratio and generating a higher yield.
Page 3
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
ANNUAL REPORT
OCTOBER 31, 2014
INVESTMENT MANAGER
The First Trust Leveraged Finance Team is comprised of twelve experienced
investment professionals specializing in below investment grade securities. The
team is comprised of portfolio management, research, trading and operations. As
of October 31, 2014, the First Trust Leveraged Finance Team managed or
supervised approximately $1.33 billion in senior secured bank loans and
high-yield bonds. These assets are managed across various strategies, including
a closed-end fund, an open-end fund, four exchange-traded funds and a series of
unit investment trusts on behalf of retail and institutional clients.
PORTFOLIO MANAGEMENT TEAM
WILLIAM HOUSEY, CFA - SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER
SCOTT D. FRIES, CFA - SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
PETER FASONE, CFA - VICE PRESIDENT, PORTFOLIO MANAGER
COMMENTARY
FIRST TRUST SHORT DURATION HIGH INCOME FUND
The primary investment objective of First Trust Short Duration High Income Fund
(the "Fund") is to seek to provide a high level of current income. The Fund's
secondary objective is capital appreciation.
MARKET RECAP
The 12 months covered by this report were generally strong for the senior loan
and high yield market despite the volatility at the end of the period in late
September and early October. For the first time in quite a while, a healthy dose
of volatility was introduced into various markets. The volatility was driven
largely by geopolitical headlines, including Russia/Ukraine, Gaza, Banco
Espirito Santo bailout, Argentine default, etc. More importantly for
fixed-income investors, with the Federal Reserve's (the "Fed") unprecedented
stimulus program now complete, investor attention has begun to shift toward 2015
and the timing of the first interest rate increase. Interest rates have indeed
been volatile over the past year, as evidenced by the fact that after setting a
12-month high on December 31, 2013 at 3.03%, 10-year Treasury yields touched
2.34% just before the end of August, exceeded 2.60% in September, were below
2.00% intra-day in a volatile October market and closed October at 2.34%.
Senior Loan Market
The S&P/LSTA Leveraged Loan Index returned 3.36% for the 12-month period ended
October 31, 2014. Additionally, performance throughout the period was
consistently positive with only two months posting negative performance. From a
credit-quality perspective, lower-credit rated issues provided the strongest
performance for the period. Lower-quality CCC rated issues returned 8.41% in the
period, significantly outperforming the returns of higher quality B rated issues
at 3.49% and BB rated issues at 2.40%. The average price of loans in the market
began the period at $97.90, and after peaking at $99.00 at the end of June, loan
prices ended the period close to unchanged at $97.40.
High-Yield Bond Market
The Bank of America Merrill Lynch U.S. High Yield Master II Constrained Index
returned 5.85% for the 12-month period. Contrary to the returns in senior loans,
lower quality high-yield bonds underperformed higher quality high-yield bonds in
the period. Lower-quality rated issues, CCC and below returned 3.65% in the
period, which compares to returns of higher-quality B rated issues at 5.40% and
BB rated issues at 7.69%. Average bond prices fell during the period, from
$103.70 to $102.40.
Credit Quality/Default Rates
Despite the widely anticipated default of TXU Energy, the largest senior loan
debt issuer and a large high-yield bond issuer, defaults remained at or below
their long-term average for both asset classes. We believe this is because
corporate fundamentals remain healthy as evidenced by the fact that senior loan
issuers that file their financial results publicly grew cash flows by
approximately 9% year-over-year in the second quarter of 2014 (latest data
available), which represents 20 straight quarters of cash flow growth.
FUND PERFORMANCE
The Fund's I share performance since October 31, 2013 was 3.40%, trailing the
blended index return of 4.61% (comprised of 50% S&P/LSTA Leveraged Loan Index
and 50% Bank of America Merrill Lynch U.S. High Yield Master II Constrained
Page 4
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
ANNUAL REPORT
OCTOBER 31, 2014
Index). The primary driver of this underperformance was the Fund's tilt towards
senior loans and away from high-yield bonds, in a market environment where
high-yield bonds outperformed senior loans. At the end of the period, the Fund's
exposure to senior loans was 63.85% and the Fund's exposure to high-yield bonds,
while less than the blended index, increased to 36.15% from 22.90% one year ago.
Toward the end of the reporting period, high-yield bonds experienced a bout of
volatility triggered by technical imbalances in the market. This provided the
opportunity to increase the Fund's exposure to high-yield bonds at what we
believe are attractive prices. We believe this tactical ability to exploit
relative value opportunities in the market as they arise provides a significant
benefit of the Fund. While the Fund's underweight position in the lowest
credit-quality issues (CCC rated and below) and the tilt toward senior loans
relative to the blended index were headwinds to performance for the period, good
individual asset selection helped offset some of these headwinds. Moreover, the
high-quality tilt served to help reduce volatility throughout the third quarter
and into October.
The Fund's monthly distribution payment was reduced over the last 12 months to
$0.063 per share. The consequence of strong demand for the senior loan and
high-yield asset class has been reduced yields on the Fund's holdings. At the
end of the period, the effective yield based on this distribution rate was 3.68%
for the Class I shares.
MARKET AND FUND OUTLOOK
Credit markets appear well positioned for the intermediate term, in our opinion.
We believe the combination of attractive valuations, a modest default
environment, better economic growth and sound corporate fundamentals provides a
firm backdrop for returns in the periods ahead. We continue to believe that
steadily improving economic data will provide the Fed the motivation it requires
to begin the process of raising interest rates in the second half of 2015. In
the interim, recent volatility in the market has largely been technically
induced (supply/demand imbalance). This is in stark contrast to volatility that
is fundamentally induced, when company financial performance is showing signs of
weakness. We believe that technically induced volatility, which we have
experienced in the third quarter, tends to lead to opportunities for patient
investors. A healthy dose of volatility typically means that risks are priced
more attractively, and price levels may be lower than the fundamentals would
warrant.
As we evaluate new investment opportunities, decisions will continue to be
rooted in our rigorous bottom-up credit analysis and focus on the opportunities
that we believe offer the best risk and reward balance for the Fund. Despite the
many distractions and market conditions that ebb and flow every quarter, we
remain firmly focused on finding value in the high-yield bond and senior loan
markets.
Page 5
FIRST TRUST SHORT DURATION HIGH INCOME FUND
UNDERSTANDING YOUR FUND EXPENSES
OCTOBER 31, 2014 (UNAUDITED)
As a shareholder of the First Trust Short Duration High Income Fund, you incur
two types of costs: (1) transaction costs, including sales charges (loads) on
purchases of Class A Shares and contingent deferred sales charges on the lesser
of purchase price or redemption proceeds of Class C Shares; and (2) ongoing
costs, including management fees; distribution and/or service (12b-1) fees; and
other Fund expenses. This Example is intended to help you understand your
ongoing costs (in U.S. dollars) of investing in the Fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended October 31, 2014.
ACTUAL EXPENSES
The first three columns of the table below provide information about actual
account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid over the period. Simply divide your account value by $1,000 (for
example, an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the third column under the heading entitled "Expenses
Paid During Period" to estimate the expenses you paid on your account during the
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The next three columns of the table below provide information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing cost of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or contingent deferred sales charges. Therefore, the
hypothetical section of the table is useful in comparing ongoing costs only, and
will not help you determine the relative total costs of owning different funds.
In addition, if these transactional costs were included, your costs would have
been higher.
--------------------------------------------------------------------------------------------------------
HYPOTHETICAL
ACTUAL EXPENSES (5% RETURN BEFORE EXPENSES)
--------------------------------------------- -------------------------------------------
BEGINNING ENDING EXPENSES PAID BEGINNING ENDING EXPENSES PAID
ACCOUNT ACCOUNT DURING PERIOD ACCOUNT ACCOUNT DURING PERIOD ANNUALIZED
VALUE VALUE 5/1/2014 - VALUE VALUE 5/1/2014 - EXPENSE
5/1/2014 10/31/2014 10/31/2014 (a) 5/1/2014 10/31/2014 10/31/2014 (a) RATIOS (b)
--------------------------------------------------------------------------------------------------------
Class A $ 1,000.00 $ 1,011.50 $ 6.34 $ 1,000.00 $ 1,018.90 $ 6.36 1.25%
Class C 1,000.00 1,007.80 10.12 1,000.00 1,015.12 10.16 2.00
Class I 1,000.00 1,012.80 5.07 1,000.00 1,020.16 5.09 1.00
(a) Expenses are equal to the annualized expense ratios as indicated in the
table, multiplied by the average account value over the period (May 1,
2014 through October 31, 2014), multiplied by 184/365 (to reflect the
six-month period).
(b) These expense ratios reflect expense caps.
Page 6
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2014
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
------------- ------------------------------------------------------- ---------- ------------- --------------
SENIOR FLOATING-RATE LOAN INTERESTS - 59.8%
AEROSPACE & DEFENSE - 0.1%
$ 184,462 DynCorp International, Inc., Term Loan................. 6.25% 07/07/16 $ 183,770
--------------
AGRICULTURAL PRODUCTS - 0.4%
690,244 Jimmy Sanders (Pinnacle Operating Corp.),
Refinancing Term Loan (First Lien).................. 4.75% 11/15/18 685,068
--------------
ALTERNATIVE CARRIERS - 0.1%
200,000 Level 3 Financing, Inc., Tranche B 2020 Term
Loan................................................ 4.00% 01/15/20 199,000
--------------
APPAREL RETAIL - 0.7%
399,000 J.C. Penney Corp., Inc., Term Loan..................... 5.00% 06/20/19 389,691
495,011 Neiman Marcus Group, Inc., The, Other Term Loan........ 4.25% 10/25/20 488,204
399,000 Nine West Holdings, Inc., Initial Loan................. 4.75% 10/08/19 389,524
--------------
1,267,419
--------------
APPLICATION SOFTWARE - 1.0%
525,891 Epicor Software Corp., Term B-2 Loan................... 4.00% 05/16/18 520,963
970,636 Infor (US), Inc., Tranche B-5 Term Loan................ 3.75% 06/03/20 956,805
24,000 Mitchell International, Inc., Initial Term Loan........ 4.50% 10/13/20 23,767
263,569 Triple Point Technologies, Inc., Term Loan............. 5.25% 07/10/20 237,212
--------------
1,738,747
--------------
AUTO PARTS & EQUIPMENT - 1.6%
81,420 Affinia Group, Inc., Tranche B-2 Term Loan............. 4.75% 04/27/20 81,217
598,500 Cooper Standard Holdings (CS Intermediate Holdco 2
LLC), Term Loan..................................... 4.00% 04/04/21 591,617
1,080,000 Gates Global LLC, Initial Dollar Term Loan............. 4.25% 07/03/21 1,066,500
400,000 Metaldyne Performance Group (MPG Holdco I, Inc.),
Term Loan B......................................... 4.50% 10/20/21 400,000
245,625 Remy International, Inc., Term B Loan 2013............. 4.25% 03/05/20 243,169
486,362 Tower Automotive Holdings USA LLC, Initial Term
Loan (2014)......................................... 4.00% 04/23/20 479,524
--------------
2,862,027
--------------
BROADCASTING - 2.1%
149,362 Clear Channel Communications, Inc., Tranche D
Term Loan........................................... 6.90% 01/30/19 140,797
1,700,000 Clear Channel Communications, Inc., Tranche E
Term Loan........................................... 7.65% 07/30/19 1,632,527
47,406 Cumulus Media Holdings, Inc., Term Loan................ 4.25% 12/23/20 46,852
667,993 Hubbard Radio LLC, Tranche 1 Term Loan................. 4.50% 04/29/19 663,263
668,707 NEP/NCP Holdco, Inc., Amendment No. 3
Incremental Term Loan (First Lien).................. 4.25% 01/22/20 651,989
28,571 NEP/NCP Holdco, Inc., Term Loan (Second Lien).......... 9.50% 07/22/20 28,500
73,253 Tribune Co., Initial Term Loan......................... 4.00% 12/27/20 72,589
492,500 Univision Communications, Inc., 2013 Incremental
Term Loan........................................... 4.00% 03/01/20 487,063
--------------
3,723,580
--------------
See Notes to Financial Statements Page 7
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
------------- ------------------------------------------------------- ---------- ------------- --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
BUILDING PRODUCTS - 0.4%
$ 641,855 Apex Tool Group LLC, Term Loan......................... 4.50% 01/31/20 $ 608,157
167,666 Unifrax Holding Co., New Term Dollar Loan.............. 4.25% 11/28/18 165,193
--------------
773,350
--------------
CABLE & SATELLITE - 1.1%
2,000,000 Charter Communications Operating LLC, Term G
Loan................................................ 4.25% 09/10/21 2,012,500
--------------
CASINOS & GAMING - 4.3%
750,000 Amaya Gaming Group, 2nd Lien TL........................ 8.00% 07/31/22 756,878
1,500,000 Amaya Gaming Group, Initial Term B Loan (First
Lien)............................................... 5.00% 08/01/21 1,487,190
994,987 Caesars Entertainment Resort Properties LLC, Term B
Loan................................................ 7.00% 10/11/20 947,497
3,337,638 Caesars Growth Partners LLC, Term B Loan (First
Lien)............................................... 6.25% 05/08/21 3,145,724
259,790 CityCenter Holdings LLC, Term B Loan................... 4.25% 10/16/20 257,971
257,976 ROC Finance LLC, Funded Term B Loan.................... 5.00% 06/20/19 246,610
978,104 Station Casinos, Inc., B Term Loan..................... 4.25% 03/02/20 966,611
--------------
7,808,481
--------------
COAL & CONSUMABLE FUELS - 0.2%
393,471 Arch Coal, Inc., Term Loan............................. 6.25% 05/16/18 346,817
--------------
COMMUNICATIONS EQUIPMENT - 0.1%
171,331 Mitel Networks Corp., Term Loan........................ 5.25% 01/31/20 171,189
--------------
COMPUTER HARDWARE - 2.1%
3,818,688 Dell, Inc., Term B Loan................................ 4.50% 04/29/20 3,822,010
--------------
CONSTRUCTION MACHINERY & HEAVY TRUCKS - 0.1%
115,518 Navistar, Inc., Tranche B Term Loan.................... 5.75% 08/17/17 115,735
--------------
CONSUMER FINANCE - 1.3%
344,647 Altisource Solutions S.A.R.L., Term B Loan............. 4.50% 12/09/20 306,736
1,132,750 Ocwen Loan Servicing LLC, Initial Term Loan............ 5.00% 02/15/18 1,093,104
1,081,443 Walter Investment Management Corp., Tranche B
Term Loan........................................... 4.75% 12/19/20 1,016,556
--------------
2,416,396
--------------
DATA PROCESSING & OUTSOURCED SERVICES - 0.9%
1,122,188 Interactive Data Corp., Term Loan...................... 4.75% 05/02/21 1,121,626
497,500 Sungard Availability Services Capital, Term Loan B..... 6.00% 03/29/19 442,775
--------------
1,564,401
--------------
DIVERSIFIED SUPPORT SERVICES - 0.6%
1,020,857 SMG Holdings, Inc., Term Loan.......................... 4.50% 02/27/20 1,018,305
--------------
ELECTRIC UTILITIES - 0.3%
100,000 TXU (Texas Competitive Electric Holdings Co. LLC),
2014 Term Loan (Non-Extending) (c) (d).............. 4.65% 10/10/14 72,313
750,000 TXU (Texas Competitive Electric Holdings Co. LLC),
2017 Term Loan (Extending) (c) (d).................. 4.65% 10/10/17 545,355
--------------
617,668
--------------
Page 8 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
------------- ------------------------------------------------------- ---------- ------------- --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
ELECTRONIC EQUIPMENT & INSTRUMENT - 0.4%
$ 750,000 Zebra Technologies Corp., Initial Term Loan............ 4.75% 09/30/21 $ 754,687
--------------
ENVIRONMENTAL & FACILITIES SERVICES - 0.8%
750,000 ServiceMaster Co., Initial Term Loan................... 4.25% 07/01/21 742,657
794,000 WTG Holdings III Corp. (EWT Holdings III Corp.),
Term Loan (First Lien).............................. 4.75% 01/15/21 786,060
--------------
1,528,717
--------------
HEALTH CARE EQUIPMENT - 1.0%
454,670 Carestream Health, Inc. (Onex Carestream Finance
L.P.), Term Loan (First Lien 2013).................. 5.00% 06/07/19 454,956
568,647 DJO Finance LLC (ReAble Therapeutics Finance
LLC), New Tranche B Term Loan....................... 4.25% 09/15/17 565,520
282,396 Ikaria, Inc., Initial Term Loan (First Lien)........... 5.00% 02/12/21 282,325
543,515 Kinetic Concepts, Inc., Dollar Term E-1 Loan........... 4.00% 05/04/18 538,760
--------------
1,841,561
--------------
HEALTH CARE FACILITIES - 1.4%
1,544,000 CHS/Community Health Systems, Inc., 2021 Term D
Loan................................................ 4.25% 01/25/21 1,544,479
300,000 Surgery Centers Holdings, Inc., 1st Lien Term
Loan................................................ 5.25% 07/24/20 299,439
663,180 Surgical Care Affiliates LLC, Class B Term Loan -
Extending........................................... 4.23% 12/29/17 653,232
49,004 United Surgical Partners International, Inc., New
Tranche B Term Loan................................. 4.75% 04/03/19 48,969
--------------
2,546,119
--------------
HEALTH CARE SERVICES - 2.7%
355,357 CareCore National LLC, Term Loan....................... 5.50% 03/05/21 351,583
1,147,125 Curo Health Services Holdings, Inc., Initial Term
Loan (First Lien)................................... 5.75% 06/08/20 1,121,315
936,245 Envision Healthcare Corp. (Emergency Medical
Services Corp.), Initial Term Loan.................. 4.00% 05/25/18 928,989
746,241 Gentiva Health Services, Inc., Initial Term B Loan..... 6.50% 10/18/19 746,860
235,938 Gentiva Health Services, Inc., Initial Term C Loan..... 5.50% 10/18/18 235,275
1,083,333 Healogics, Inc., Initial Term Loan (First Lien)........ 5.25% 07/01/21 1,076,562
379,113 Heartland Dental Care LLC, Incremental Term Loan....... 5.50% 12/21/18 378,165
--------------
4,838,749
--------------
HEALTH CARE TECHNOLOGY - 1.2%
598,500 Connolly Holdings, Inc., Initial Term Loan (First
Lien)............................................... 5.00% 05/14/21 594,760
124,063 Healthport Technologies LLC (CT Technologies
Intermediate Holdings, Inc.), Term Loan............. 5.25% 10/04/19 123,752
400,000 TriZetto Group, Inc.(TZ Merger Sub, Inc.), Term
Loan (Second Lien).................................. 8.50% 03/28/19 402,000
1,041,472 Truven Health Analytics, Inc. (VCPH Holding Corp.),
Term Loan B......................................... 4.50% 05/31/19 1,020,642
--------------
2,141,154
--------------
HOMEFURNISHING RETAIL - 0.6%
1,083,232 Serta Simmons Holdings LLC, Term Loan B................ 4.25% 10/01/19 1,072,128
--------------
See Notes to Financial Statements Page 9
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
------------- ------------------------------------------------------- ---------- ------------- --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
HOTELS, RESORTS & CRUISE LINES - 1.0%
$ 680,920 Extended Stay America (ESH Hospitality, Inc.), Term
Loan................................................ 5.00% 06/24/19 $ 683,051
1,108,650 La Quinta Intermediate Holdings LLC, Initial Term
Loan................................................ 4.00% 04/14/21 1,099,648
--------------
1,782,699
--------------
HYPERMARKETS & SUPER CENTERS - 2.6%
346,000 Albertsons LLC, Term B-4 Loans......................... 4.50% 08/25/21 346,062
2,026,667 Albertsons LLC, Term B-4-1 Loans....................... 4.50% 08/25/21 2,027,032
232,246 BJ's Wholesale Club, Inc., 2013 (November)
Replacement Loan (Second Lien)...................... 8.50% 03/26/20 232,005
2,146,070 BJ's Wholesale Club, Inc., New 2013 (November)
Replacement Loan (First Lien)....................... 4.50% 09/26/19 2,122,699
--------------
4,727,798
--------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS - 0.3%
461,538 TPF II LP, Term Loan................................... 5.50% 10/02/21 458,654
--------------
INDUSTRIAL CONGLOMERATES - 0.4%
465,300 Gardner Denver, Inc., Initial Dollar Term Loan......... 4.25% 07/30/20 458,451
188,545 Hamilton Sundstrand Industrial (Silver II US Holdings
LLC), Refinancing Term Loan......................... 4.00% 12/13/19 185,089
--------------
643,540
--------------
INDUSTRIAL MACHINERY - 0.4%
53,724 Dematic Holdings (Mirror Bidco Corp.), New
Incremental Term Loan............................... 4.25% 12/28/19 53,052
582,079 Filtration Group Corp., Term Loan (First Lien)......... 4.50% 11/20/20 579,751
--------------
632,803
--------------
INSURANCE BROKERS - 1.5%
322,400 Amwins Group LLC, New Term Loan (First Lien)........... 5.00% 09/06/19 321,352
834,479 Confie Seguros Holding II Co., Term B Loan (First
Lien)............................................... 5.75% 11/09/18 829,263
296,250 Cooper Gay Swett & Crawford Ltd., Term Loan
(First Lien)........................................ 5.00% 04/16/20 266,625
180,000 Cooper Gay Swett & Crawford Ltd., Term Loan
(Second Lien)....................................... 8.25% 10/16/20 151,200
1,067,262 HUB International Ltd., Initial Term Loan (New)........ 4.25% 10/02/20 1,052,587
98,629 USI, Inc. (Compass Investors, Inc.), Initial Term
Loan................................................ 4.25% 12/27/19 97,519
--------------
2,718,546
--------------
INTEGRATED TELECOMMUNICATION SERVICES - 1.8%
492,750 Avaya, Inc., Term B-3 Loan............................. 4.50% 10/26/17 476,529
1,403,052 Numericable U.S. LLC, Dollar Denominated Tranche
B-1 Loan............................................ 4.50% 05/21/20 1,405,030
1,213,831 Numericable U.S. LLC, Dollar Denominated Tranche
B-2 Loan............................................ 4.50% 05/21/20 1,215,543
148,192 XO Communications LLC, Initial Term Loan............... 4.25% 03/20/21 146,647
--------------
3,243,749
--------------
Page 10 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
------------- ------------------------------------------------------- ---------- ------------- --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
IT CONSULTING & OTHER SERVICES - 0.0%
$ 37,596 Sirius Computer Solutions, Inc. (SCS Holdings I, Inc.),
Term Loan........................................... 7.00% 12/07/18 $ 37,596
--------------
LEISURE FACILITIES - 0.4%
663,333 Planet Fitness Holdings LLC, Term Loan................. 4.75% 03/31/21 663,333
--------------
LIFE SCIENCES TOOLS & SERVICES - 3.1%
641,834 Immucor, Inc., Term B-2 Loan........................... 5.00% 08/19/18 640,429
300,000 INC Research LLC, Term Loan B.......................... 4.75% 11/15/21 298,875
2,350,317 InVentiv Health, Inc., Term B-4 Loan................... 7.75% 05/15/18 2,318,000
798,000 Millennium Laboratories LLC, Tranche B Term
Loan................................................ 5.25% 04/16/21 797,505
1,080,625 Ortho-Clinical Diagnostics, Inc., Initial Term Loan. 4.75% 06/30/21 1,068,738
500,000 Sterigenics International (STHI Intermediate Holding
Corp.), Initial Term Loan........................... 4.50% 08/06/21 496,875
--------------
5,620,422
--------------
METAL & GLASS CONTAINERS - 0.7%
248,750 Ardagh Holdings USA, Inc. (Ardagh Packaging
Finance S.A.), New Term Loan........................ 4.00% 12/17/19 246,056
615,385 Berlin Packaging LLC, Initial Term Loan (First
Lien)............................................... 4.50% 10/01/21 611,539
199,500 BWAY Holding Co., Initial Term Loan.................... 5.50% 08/14/20 200,248
300,000 Mauser Holdings GmBH, Initial Dollar Term Loan
(First Lien)........................................ 4.50% 07/31/21 295,125
--------------
1,352,968
--------------
MOVIES & ENTERTAINMENT - 1.8%
2,494,987 Formula One (Alpha Topco Ltd.), Facility B3
(USD)............................................... 4.75% 07/30/21 2,474,204
125,000 Lions Gate Entertainment Corp., Loan................... 5.00% 07/19/20 125,312
100,000 TWCC Holding Corp., Term Loan (Second Lien)............ 7.00% 06/26/20 97,958
498,750 WME IMG Worldwide, Inc., Term Loan (First
Lien)............................................... 5.25% 05/06/21 490,147
--------------
3,187,621
--------------
OIL & GAS EXPLORATION & PRODUCTION - 0.5%
400,000 American Energy Marcellus Holdings LLC, Initial
Loan (First Lien)................................... 5.25% 08/04/20 389,000
472,222 American Energy Marcellus Holdings LLC, Initial
Loan (Second Lien).................................. 8.50% 08/04/21 449,792
--------------
838,792
--------------
OIL & GAS REFINING & MARKETING - 0.1%
133,333 CITGO Petroleum Corp., Term B Loan..................... 4.50% 07/29/21 133,056
--------------
OTHER DIVERSIFIED FINANCIAL SERVICES - 1.5%
715,737 American Beacon Advisors, Inc., Initial Term Loan...... 4.75% 11/22/19 712,158
1,000,000 First Data Corp., 2021 New Dollar Term Loan............ 4.15% 03/24/21 993,130
618,750 Guggenheim Partners Investment Management
Holdings LLC, Initial Term Loan..................... 4.25% 07/22/20 614,883
336,946 Moneygram International, Inc., Term Loan............... 4.25% 03/27/20 325,716
--------------
2,645,887
--------------
See Notes to Financial Statements Page 11
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
------------- ------------------------------------------------------- ---------- ------------- --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
PACKAGED FOODS & MEATS - 3.5%
$ 729,285 Blue Buffalo Co. Ltd., Term B-3 Loan................... 3.75% 08/08/19 $ 721,992
969,675 Boulder Brands, Inc. (GFA Brands, Inc.), Term Loan
B (July 2014)....................................... 4.50% 07/09/20 950,892
397,000 Del Monte Foods, Inc., Initial Loan (First Lien)....... 4.25% 02/18/21 372,188
1,192,295 Ferrara Candy Co. (Candy Intermediate Holdings,
Inc.), Initial Term Loan............................ 7.50% 06/18/18 1,138,642
1,000,000 H.J. Heinz Company, Term B-2 Loan...................... 3.50% 06/05/20 993,520
2,111,415 New HB Acquisition LLC, Term B Loan.................... 6.75% 04/09/20 2,147,056
--------------
6,324,290
--------------
PAPER PACKAGING - 0.1%
148,875 Exopack Holding Corp., Term Loan B..................... 5.25% 05/08/19 149,247
49,129 Reynolds Group Holdings, Inc., Incremental U.S.
Term Loan........................................... 4.00% 12/01/18 48,822
--------------
198,069
--------------
PERSONAL PRODUCTS - 0.2%
375,000 Prestige Brands International, Inc., Term B-2 Loan..... 4.50% 09/03/21 375,116
--------------
PHARMACEUTICALS - 1.7%
414,773 Akorn, Inc., Loan...................................... 4.50% 04/16/21 412,960
1,330,000 Catalent Pharma Solutions, Inc., Dollar Term Loan...... 4.50% 05/20/21 1,327,234
460,831 Par Pharmaceutical Cos., Inc., Term B-2 Loan........... 4.00% 09/30/19 453,536
598,500 Patheon, Inc. (JLL/Delta Dutch Newco B.V.), Initial
Dollar Term Loan.................................... 4.25% 03/11/21 582,789
385,000 Salix Pharmaceuticals Ltd., Term Loan.................. 4.25% 01/02/20 384,657
--------------
3,161,176
--------------
PROPERTY & CASUALTY INSURANCE - 0.6%
590,977 Cunningham Lindsey U.S., Inc., Initial Term Loan
(First Lien)........................................ 5.00% 12/10/19 580,635
600,000 Sedgwick Claims Management Services, Inc., Initial
Loan (Second Lien).................................. 6.75% 02/28/22 582,000
--------------
1,162,635
--------------
PUBLISHING - 0.8%
348,250 Cengage Learning Acquisitions, Inc., Term Loan......... 7.00% 03/31/20 348,424
1,243,750 Mergermarket USA, Inc., 2014 Incremental Term
Loan................................................ 4.50% 02/04/21 1,186,227
--------------
1,534,651
--------------
REAL ESTATE OPERATING COMPANIES - 0.8%
1,500,000 ClubCorp Club Operations, Inc., Term Loan B
(September 2014).................................... 4.50% 09/24/20 1,484,370
--------------
REAL ESTATE SERVICES - 0.1%
246,264 Realogy Corp., Initial Term B Loan 2014................ 3.75% 03/05/20 244,109
--------------
RESEARCH & CONSULTING SERVICES - 1.2%
780,000 Acosta, Inc., Initial Term Loan........................ 5.00% 09/26/21 780,195
14,516 Advantage Sales & Marketing, Inc., Delayed Draw
Term Loan (e)....................................... 3.25% (f) 07/23/21 14,378
14,516 Advantage Sales & Marketing, Inc., Delayed Draw
Term Loan........................................... 4.25% 07/23/21 14,378
Page 12 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
------------- ------------------------------------------------------- ---------- ------------- --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
RESEARCH & CONSULTING SERVICES (CONTINUED)
$ 870,968 Advantage Sales & Marketing, Inc., Initial Term Loan
(First Lien)........................................ 4.25% 07/23/21 $ 862,694
412,554 Information Resources, Inc., Term Loan................. 4.75% 09/30/20 412,554
--------------
2,084,199
--------------
RESTAURANTS - 3.0%
330,833 Arby's Restaurant Group (ARG IH Corp.), Term
Loan................................................ 4.75% 11/15/20 330,006
1,500,000 Burger King Corp., Term Loan B......................... 4.50% 09/30/21 1,498,470
50,000 Focus Brands, Inc., Term Loan (Second Lien)............ 10.25% 08/21/18 50,127
1,000,000 Portillo's Holdings, LLC, Second Lien Term Loan........ 8.00% 08/15/22 992,500
2,166,667 Portillo's Holdings, LLC, Term B Loan (First Lien)..... 4.75% 08/02/21 2,134,167
428,571 Red Lobster Management LLC, Initial Term Loan
(First Lien)........................................ 6.25% 07/28/21 427,500
--------------
5,432,770
--------------
RETAIL REITS - 0.1%
200,000 Capital Automotive LLC, Term Loan (Second Lien)........ 6.00% 04/30/20 202,000
--------------
SECURITY & ALARM SERVICES - 0.1%
30,250 Garda World Security Corp., Term B Delayed Draw
Loan................................................ 4.00% 11/08/20 29,431
118,250 Garda World Security Corp., Term Loan B................ 4.00% 11/08/20 115,048
--------------
144,479
--------------
SEMICONDUCTORS - 1.1%
1,000,000 Avago Technologies Cayman Ltd., Term Loan.............. 3.75% 05/06/21 996,380
742,514 Freescale Semiconductor, Inc., Tranche B-4 Term
Loan................................................ 4.25% 02/28/20 731,643
237,600 Freescale Semiconductor, Inc., Tranche B5 Term
Loan................................................ 5.00% 01/15/21 237,049
--------------
1,965,072
--------------
SPECIALIZED CONSUMER SERVICES - 1.0%
1,520,403 Asurion LLC, Incremental Tranche B-1 Term Loan......... 5.00% 05/24/19 1,520,829
352,941 Asurion LLC, Term Loan (Second Lien)................... 8.50% 03/03/21 358,324
--------------
1,879,153
--------------
SPECIALIZED FINANCE - 0.7%
741,264 Duff & Phelps Corp., Initial Term Loan................. 4.50% 04/23/20 732,925
514,438 FLY Leasing Limited (Fly Funding II S.A.R.L),
Loan................................................ 4.50% 08/09/19 513,795
--------------
1,246,720
--------------
SPECIALTY CHEMICALS - 0.8%
61,648 A.I. Chem (Allnex (Luxembourg) & Cy S.C.A.),
Tranche B-1 Term Loan............................... 4.50% 10/03/19 61,186
31,986 A.I. Chem (Allnex (Luxembourg) & Cy S.C.A.),
Tranche B-2 Term Loan............................... 4.50% 10/03/19 31,746
378,795 Axalta Coating Systems U.S. Holdings, Inc.,
Refinanced Term B Loan.............................. 3.75% 02/01/20 372,405
400,000 Emerald Performance Materials LLC, Initial Term
Loan (First Lien)................................... 4.50% 08/01/21 393,332
395,625 NuSil Technology LLC, Term Loan........................ 5.25% 04/07/17 389,568
See Notes to Financial Statements Page 13
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
------------- ------------------------------------------------------- ---------- ------------- --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
SPECIALTY CHEMICALS (CONTINUED)
$ 284,493 Polymer Group, Inc., Initial Loan...................... 5.25% 12/19/19 $ 284,493
--------------
1,532,730
--------------
SPECIALTY STORES - 0.3%
223,214 Toys "R" US-Delaware, Inc., Canadian FILO TL........... 8.25% 10/24/19 219,308
276,786 Toys "R" US-Delaware, Inc., FILO Term Loan............. 8.25% 10/24/19 271,942
--------------
491,250
--------------
SYSTEMS SOFTWARE - 2.0%
192,097 Applied Systems, Inc., Initial Term Loan (First
Lien)............................................... 4.25% 01/25/21 189,936
225,000 Applied Systems, Inc., Initial Term Loan (Second
Lien)............................................... 7.50% 01/23/22 223,407
3,266,126 BMC Software Finance, Inc., Initial US Term
Loan................................................ 5.00% 09/10/20 3,228,369
--------------
3,641,712
--------------
TRUCKING - 0.1%
147,750 SIRVA Worldwide, Inc., Loan............................ 7.50% 03/27/19 149,228
--------------
WIRELESS TELECOMMUNICATION SERVICES - 0.0%
79,063 Lightower Fiber Networks (LTS Buyer LLC or Sidera
Networks, Inc.), Term Loan (Second Lien)............ 8.00% 04/12/21 78,338
--------------
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS 108,069,109
(Cost $109,244,728) --------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ------------------------------------------------------- ---------- ------------- --------------
CORPORATE BONDS AND NOTES - 28.2%
AEROSPACE & DEFENSE - 0.9%
1,500,000 DigitalGlobe, Inc. (g)................................. 5.25% 02/01/21 1,466,250
100,000 GenCorp, Inc........................................... 7.13% 03/15/21 106,750
--------------
1,573,000
--------------
AGRICULTURAL PRODUCTS - 0.2%
250,000 Darling Ingredients, Inc............................... 5.38% 01/15/22 251,563
125,000 Pinnacle Operating Corp. (g)........................... 9.00% 11/15/20 135,000
--------------
386,563
--------------
ALTERNATIVE CARRIERS - 0.8%
1,500,000 Level 3 Escrow II, Inc. (g)............................ 5.38% 08/15/22 1,530,000
--------------
APPLICATION SOFTWARE - 1.0%
100,000 ACI Worldwide, Inc. (g)................................ 6.38% 08/15/20 104,500
62,000 Audatex North America, Inc. (g)........................ 6.00% 06/15/21 65,875
63,000 Audatex North America, Inc. (g)........................ 6.13% 11/01/23 67,095
1,500,000 Infor Software Parent LLC/Infor Software Parent,
Inc. (g) (h)........................................ 7.13% 05/01/21 1,526,250
--------------
1,763,720
--------------
AUTO PARTS & EQUIPMENT - 0.4%
250,000 American Axle & Manufacturing, Inc..................... 6.25% 03/15/21 263,750
250,000 Dana Holding Corp...................................... 5.38% 09/15/21 261,250
Page 14 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ------------------------------------------------------- ---------- ------------- --------------
CORPORATE BONDS AND NOTES (CONTINUED)
AUTO PARTS & EQUIPMENT (CONTINUED)
$ 250,000 MPG Holdco I, Inc. (g)................................. 7.38% 10/15/22 $ 263,750
--------------
788,750
--------------
BROADCASTING - 2.3%
1,200,000 Gannett Co., Inc. (g).................................. 4.88% 09/15/21 1,212,000
500,000 Gray Television, Inc................................... 7.50% 10/01/20 525,625
375,000 Media General Financing Sub, Inc. (g).................. 5.88% 11/15/22 378,750
188,000 Nexstar Broadcasting, Inc.............................. 6.88% 11/15/20 195,990
250,000 Sinclair Television Group, Inc......................... 6.38% 11/01/21 261,875
500,000 Sinclair Television Group, Inc......................... 6.13% 10/01/22 520,000
1,000,000 Sinclair Television Group, Inc. (g).................... 5.63% 08/01/24 992,500
--------------
4,086,740
--------------
BUILDING PRODUCTS - 0.5%
250,000 Allegion US Holding Co., Inc........................... 5.75% 10/01/21 263,125
125,000 American Builders & Contractors Supply Co.,
Inc. (g)............................................ 5.63% 04/15/21 126,875
100,000 Apex Tool Group LLC (g)................................ 7.00% 02/01/21 90,500
500,000 Hillman Group (The), Inc. (g).......................... 6.38% 07/15/22 488,750
--------------
969,250
--------------
CABLE & SATELLITE - 2.0%
1,500,000 CCOH Safari LLC........................................ 5.75% 12/01/24 1,512,187
1,000,000 Cequel Communications Holdings I LLC/Cequel
Capital Corp. (g)................................... 6.38% 09/15/20 1,047,500
1,000,000 Cequel Communications Holdings I LLC/Cequel
Capital Corp. (g)................................... 5.13% 12/15/21 981,250
--------------
3,540,937
--------------
CASINOS & GAMING - 1.8%
550,000 Caesars Growth Properties Holdings LLC/Caesars
Growth Properties Finance, Inc. (g)................. 9.38% 05/01/22 513,562
50,000 MGM Resorts International.............................. 8.63% 02/01/19 58,125
1,850,000 MGM Resorts International.............................. 7.75% 03/15/22 2,136,750
500,000 Station Casinos LLC.................................... 7.50% 03/01/21 525,000
--------------
3,233,437
--------------
CONSTRUCTION MACHINERY & HEAVY TRUCKS - 0.0%
50,000 Oshkosh Corp........................................... 5.38% 03/01/22 51,250
--------------
CONSUMER FINANCE - 0.2%
125,000 Nationstar Mortgage LLC/Nationstar Capital Corp........ 6.50% 08/01/18 123,125
250,000 Ocwen Financial Corp. (g).............................. 6.63% 05/15/19 236,250
--------------
359,375
--------------
DIVERSIFIED REAL ESTATE ACTIVITIES - 0.4%
700,000 Taylor Morrison Communities, Inc./Monarch
Communities, Inc. (g)............................... 5.25% 04/15/21 708,491
--------------
FOOD DISTRIBUTORS - 0.5%
500,000 C&S Group Enterprises LLC (g).......................... 5.38% 07/15/22 501,250
312,000 KeHE Distributors LLC/KeHE Finance Corp. (g)........... 7.63% 08/15/21 332,280
--------------
833,530
--------------
See Notes to Financial Statements Page 15
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ------------------------------------------------------- ---------- ------------- --------------
CORPORATE BONDS AND NOTES (CONTINUED)
HEALTH CARE EQUIPMENT - 1.0%
$ 333,000 Alere, Inc............................................. 6.50% 06/15/20 $ 345,487
400,000 Kinetic Concepts, Inc./KCI USA, Inc.................... 10.50% 11/01/18 442,000
1,000,000 Kinetic Concepts, Inc./KCI USA, Inc.................... 12.50% 11/01/19 1,107,500
--------------
1,894,987
--------------
HEALTH CARE FACILITIES - 3.2%
600,000 Amsurg Corp. (g)....................................... 5.63% 07/15/22 624,675
2,100,000 CHS/Community Health Systems, Inc. (g)................. 6.88% 02/01/22 2,270,625
500,000 HCA Holdings, Inc...................................... 6.25% 02/15/21 539,375
500,000 Kindred Healthcare, Inc. (g)........................... 6.38% 04/15/22 495,000
1,000,000 Select Medical Corp.................................... 6.38% 06/01/21 1,027,500
500,000 Tenet Healthcare Corp.................................. 6.00% 10/01/20 538,750
250,000 Vantage Oncology LLC/Vantage Oncology Finance
Co. (g)............................................. 9.50% 06/15/17 232,500
--------------
5,728,425
--------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS - 0.7%
650,000 Dynegy Finance I, Inc./Dynegy Finance II, Inc. (g)..... 7.63% 11/01/24 689,813
500,000 NRG Energy, Inc. (g)................................... 6.25% 07/15/22 525,000
--------------
1,214,813
--------------
INTEGRATED TELECOMMUNICATION SERVICES - 0.4%
110,000 Frontier Communications Corp........................... 6.25% 09/15/21 113,919
110,000 Frontier Communications Corp........................... 6.88% 01/15/25 111,650
500,000 Windstream Corp........................................ 7.75% 10/01/21 537,500
--------------
763,069
--------------
LEISURE FACILITIES - 1.1%
750,000 Cedar Fair L.P./Canada's Wonderland Co./Magnum
Management Corp.................................... 5.25% 03/15/21 757,500
1,200,000 Six Flags Entertainment Corp. (g)...................... 5.25% 01/15/21 1,212,000
--------------
1,969,500
--------------
LIFE SCIENCES TOOLS & SERVICES - 1.4%
1,500,000 Crimson Merger Sub, Inc. (g)........................... 6.63% 05/15/22 1,404,375
500,000 Immucor, Inc........................................... 11.13% 08/15/19 547,500
145,000 inVentiv Health, Inc. (g) (i).......................... 10.00% 08/15/18 131,225
250,000 inVentiv Health, Inc. (g).............................. 11.00% 08/15/18 178,750
500,000 inVentiv Health, Inc. (g).............................. 11.00% 08/15/18 357,500
--------------
2,619,350
--------------
MOVIES & ENTERTAINMENT - 0.1%
125,000 Cinemark USA, Inc...................................... 4.88% 06/01/23 123,750
--------------
OFFICE REITS - 0.2%
375,000 DuPont Fabros Technology L.P........................... 5.88% 09/15/21 391,875
--------------
OIL & GAS EXPLORATION & PRODUCTION - 1.5%
500,000 American Energy-Permian Basin LLC/AEPB Finance
Corp. (g)........................................... 7.13% 11/01/20 435,000
125,000 American Energy-Permian Basin LLC/AEPB Finance
Corp. (g)........................................... 7.38% 11/01/21 110,000
1,500,000 Antero Resources Finance Corp.......................... 5.38% 11/01/21 1,528,125
500,000 Rice Energy, Inc. (g).................................. 6.25% 05/01/22 485,937
Page 16 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ------------------------------------------------------- ---------- ------------- --------------
CORPORATE BONDS AND NOTES (CONTINUED)
OIL & GAS EXPLORATION & PRODUCTION (CONTINUED)
$ 125,000 Sanchez Energy Corp. (g)............................... 6.13% 01/15/23 $ 119,375
--------------
2,678,437
--------------
OIL & GAS REFINING & MARKETING - 0.5%
750,000 CITGO Petroleum Corp. (g).............................. 6.25% 08/15/22 766,875
62,500 Murphy Oil USA, Inc.................................... 6.00% 08/15/23 65,781
--------------
832,656
--------------
OIL & GAS STORAGE & TRANSPORTATION - 0.4%
575,000 Crestwood Midstream Partners L.P./Crestwood
Midstream Finance Corp.............................. 6.13% 03/01/22 583,625
50,000 Regency Energy Partners L.P./Regency Energy
Finance Corp........................................ 5.88% 03/01/22 53,500
188,000 Summit Midstream Holdings LLC/Summit Midstream
Finance Corp........................................ 5.50% 08/15/22 188,470
--------------
825,595
--------------
PACKAGED FOODS & MEATS - 0.3%
500,000 JBS USA LLC/JBS USA Finance, Inc. (g).................. 7.25% 06/01/21 535,000
--------------
PHARMACEUTICALS - 1.0%
750,000 Endo Finance LLC & Endo Finco, Inc. (g)................ 7.25% 01/15/22 804,375
500,000 Par Pharmaceutical Cos., Inc........................... 7.38% 10/15/20 533,750
500,000 Valeant Pharmaceuticals International (g).............. 6.75% 08/15/21 518,125
--------------
1,856,250
--------------
RESTAURANTS - 0.2%
300,000 Seminole Hard Rock Entertainment, Inc./Seminole
Hard Rock International LLC (g)..................... 5.88% 05/15/21 297,000
--------------
SEMICONDUCTORS - 0.4%
700,000 Freescale Semiconductor, Inc. (g)...................... 6.00% 01/15/22 719,250
--------------
SPECIALIZED REITS - 0.4%
500,000 Geo Group (The), Inc................................... 5.88% 01/15/22 522,500
250,000 Geo Group (The), Inc................................... 5.88% 10/15/24 258,750
--------------
781,250
--------------
SPECIALTY CHEMICALS - 0.8%
547,000 Chemtura Corp.......................................... 5.75% 07/15/21 548,368
900,000 Hexion U.S. Finance Corp............................... 6.63% 04/15/20 904,500
--------------
1,452,868
--------------
SYSTEMS SOFTWARE - 0.5%
375,000 BMC Software Finance, Inc. (g)......................... 8.13% 07/15/21 360,938
500,000 BMC Software, Inc...................................... 7.25% 06/01/18 497,500
--------------
858,438
--------------
TRADING COMPANIES & DISTRIBUTORS - 0.6%
600,000 BlueLine Rental Finance Corp. (g)...................... 7.00% 02/01/19 633,000
500,000 Vander Intermediate Holding II Corp. (g) (j)........... 9.75% 02/01/19 531,250
--------------
1,164,250
--------------
See Notes to Financial Statements Page 17
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ------------------------------------------------------- ---------- ------------- --------------
CORPORATE BONDS AND NOTES (CONTINUED)
TRUCKING - 0.4%
$ 600,000 Avis Budget Car Rental LLC/Avis Budget Finance,
Inc. (g)............................................ 5.13% 06/01/22 $ 594,300
125,000 Avis Budget Car Rental LLC/Avis Budget Finance,
Inc................................................. 5.50% 04/01/23 126,250
--------------
720,550
--------------
WIRELESS TELECOMMUNICATION SERVICES - 2.1%
1,350,000 Sprint Corp. (g)....................................... 7.25% 09/15/21 1,431,000
1,000,000 Sprint Corp. (g)....................................... 7.88% 09/15/23 1,085,000
750,000 T-Mobile USA, Inc...................................... 6.73% 04/28/22 795,937
200,000 T-Mobile USA, Inc...................................... 6.63% 04/01/23 212,000
200,000 T-Mobile USA, Inc...................................... 6.00% 03/01/23 206,500
--------------
3,730,437
--------------
TOTAL CORPORATE BONDS AND NOTES 50,982,793
(Cost $50,395,157) --------------
FOREIGN CORPORATE BONDS AND NOTES - 5.6%
AEROSPACE & DEFENSE - 0.7%
750,000 Bombardier, Inc. (g)................................... 7.75% 03/15/20 836,250
333,000 Bombardier, Inc. (g)................................... 6.00% 10/15/22 342,366
--------------
1,178,616
--------------
ALTERNATIVE CARRIERS - 1.0%
1,750,000 Intelsat Luxembourg S.A................................ 7.75% 06/01/21 1,835,312
--------------
CABLE & SATELLITE - 0.1%
250,000 Virgin Media Finance PLC (g)........................... 6.00% 10/15/24 260,938
--------------
DIVERSIFIED CHEMICALS - 0.3%
300,000 INEOS Group Holdings S.A. (g).......................... 6.13% 08/15/18 303,750
250,000 INEOS Group Holdings S.A. (g).......................... 5.88% 02/15/19 250,313
--------------
554,063
--------------
METAL & GLASS CONTAINERS - 0.5%
62,000 Ardagh Packaging Finance PLC/Ardagh Holdings
USA, Inc. (g)....................................... 6.25% 01/31/19 62,620
114,706 Ardagh Packaging Finance PLC/Ardagh Holdings
USA, Inc. (g)....................................... 7.00% 11/15/20 117,574
750,000 Ardagh Packaging Finance PLC/Ardagh Holdings
USA, Inc. (g)....................................... 6.75% 01/31/21 768,750
--------------
948,944
--------------
OIL & GAS STORAGE & TRANSPORTATION - 0.2%
500,000 Niska Gas Storage Canada ULC/Niska Gas Storage
Canada Finance Corp. (g)............................ 6.50% 04/01/19 374,375
--------------
PHARMACEUTICALS - 1.3%
1,200,000 Capsugel S.A. (g) (k).................................. 7.00% 05/15/19 1,222,500
1,000,000 Mallinckrodt International Finance S.A./ Mallinckrodt
CB LLC (g).......................................... 5.75% 08/01/22 1,048,750
--------------
2,271,250
--------------
RESEARCH & CONSULTING SERVICES - 0.5%
825,000 Nielsen Co. Luxembourg S.A.R.L. (The) (g).............. 5.50% 10/01/21 860,062
--------------
Page 18 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ------------------------------------------------------- ---------- ------------- --------------
FOREIGN CORPORATE BONDS AND NOTES (CONTINUED)
RESTAURANTS - 0.6%
$ 1,150,000 1011778 BC ULC/New Red Finance, Inc. (g)............... 6.00% 04/01/22 $ 1,171,562
--------------
SECURITY & ALARM SERVICES - 0.4%
750,000 Garda World Security Corp. (g)......................... 7.25% 11/15/21 750,000
--------------
TOTAL FOREIGN CORPORATE BONDS AND NOTES 10,205,122
(Cost $10,206,429) --------------
TOTAL INVESTMENTS - 93.6% 169,257,024
(Cost $169,846,314) (l)
NET OTHER ASSETS AND LIABILITIES - 6.4% 11,610,636
--------------
NET ASSETS - 100.0% $ 180,867,660
==============
-----------------------------
(a) Senior Floating-Rate Loan Interests ("Senior Loans") in which the Fund
invests pay interest at rates which are periodically predetermined by
reference to a base lending rate plus a premium. These base lending rates
are generally (i) the lending rate offered by one or more major European
banks, such as the London Inter-Bank Offered Rate ("LIBOR"), (ii) the
prime rate offered by one or more United States banks or (iii) the
certificate of deposit rate. Certain Senior Loans are subject to a LIBOR
floor that establishes a minimum LIBOR rate. The interest rate shown
reflects the rate in effect at October 31, 2014. When a range of rates is
disclosed the Fund holds more than one contract within the same tranche at
varying rates.
(b) Senior Loans generally are subject to mandatory and/or optional
prepayment. As a result, the actual remaining maturity of Senior Loans may
be substantially less than the stated maturities shown.
(c) This borrower has filed for protection in federal bankruptcy court.
(d) This issuer is in default but interest is still being accrued by the Fund
and paid by the issuer.
(e) Delayed Draw Loan (all or a portion of which is unfunded). See Note 2C -
Unfunded Loan Commitments in the Notes to Financial Statements.
(f) Represents commitment fee rate on unfunded loan commitment.
(g) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the Securities
Act of 1933, as amended, and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Pursuant to
procedures adopted by the Trust's Board of Trustees, this security has
been determined to be liquid by First Trust Advisors L.P., the Fund's
advisor. Although market instability can result in periods of increased
overall market illiquidity, liquidity for each security is determined
based on security specific factors and assumptions, which require
subjective judgment. At October 31, 2014, securities noted as such
amounted to $38,686,376 or 21.39% of net assets.
(h) These notes are Senior Payment-in-Kind ("PIK") Toggle Notes whereby the
issuer may, at its option, elect to pay interest on the notes (1) entirely
in cash or (2) entirely in PIK interest. Interest paid in cash will accrue
at the rate of 7.125% per annum ("Cash Interest Rate") and PIK interest
will accrue on the notes at a rate per annum equal to the Cash Interest
Rate plus 75 basis points. The first interest payment is scheduled for
November 1, 2014.
(i) These notes are PIK Notes whereby the issuer may, at its option, elect to
pay interest on the notes (1) entirely in cash or (2) entirely in PIK
interest. Interest paid in cash will accrue at the rate of 10.00% per
annum and PIK interest will accrue on the notes at a rate per annum equal
to the Cash Interest Rate plus 200 basis points. The first interest
payment is scheduled for February 15, 2015.
(j) These notes are PIK Notes whereby the issuer may, at its option, elect to
pay interest on the notes (1) entirely in cash or (2) entirely in PIK
interest. Interest paid in cash will accrue at the rate of 9.75% per annum
and PIK interest will accrue on the notes at a rate per annum equal to the
Cash Interest Rate plus 75 basis points. This security paid interest in
cash.
(k) These notes are PIK Notes whereby the issuer may, at its option, elect to
pay interest on the notes (1) entirely in cash or (2) entirely in PIK
interest. Interest paid in cash will accrue at the rate of 7.00% per annum
and PIK interest will accrue on the notes at a rate per annum equal to the
Cash Interest Rate plus 75 basis points. This security paid interest in
cash.
(l) Aggregate cost for federal income tax purposes is $170,035,038. As of
October 31, 2014, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$1,400,770 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$2,178,784.
See Notes to Financial Statements Page 19
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of October 31,
2014 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
INVESTMENTS 10/31/2014 PRICES INPUTS INPUTS
--------------------------------------------------- ------------- ------------- ------------- -------------
Senior Floating-Rate Loan Interests*............... $ 108,069,109 $ -- $ 108,069,109 $ --
Corporate Bonds and Notes*......................... 50,982,793 -- 50,982,793 --
Foreign Corporate Bonds and Notes*................. 10,205,122 -- 10,205,122 --
------------- ------------- ------------- -------------
Total Investments.................................. $ 169,257,024 $ -- $ 169,257,024 $ --
============= ============= ============= =============
* See Portfolio of Investments for industry breakout.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at October 31, 2014.
Page 20 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2014
ASSETS:
Investments, at value
(Cost $169,846,314)......................................................................... $169,257,024
Cash........................................................................................... 14,902,807
Receivables:
Investment securities sold.................................................................. 5,012,866
Interest.................................................................................... 1,489,508
Fund shares sold............................................................................ 933,063
Prepaid expenses............................................................................... 2,254
------------
Total Assets................................................................................ 191,597,522
------------
LIABILITIES:
Payables:
Investment securities purchased............................................................. 10,080,671
Fund shares repurchased..................................................................... 357,472
Audit and tax fees.......................................................................... 58,200
Distributions payable....................................................................... 56,119
Administrative fees......................................................................... 31,890
Investment advisory fees.................................................................... 30,609
12b-1 distribution and service fees......................................................... 30,198
Transfer agent fees......................................................................... 26,297
Printing fees............................................................................... 15,075
Unfunded loan commitments................................................................... 14,516
Custodian fees.............................................................................. 11,049
Legal fees.................................................................................. 5,704
Registration fees........................................................................... 4,621
Trustees' fees and expenses................................................................. 1,603
Commitment fees............................................................................. 1,445
Financial reporting fees.................................................................... 771
Other liabilities.............................................................................. 3,622
------------
Total Liabilities........................................................................... 10,729,862
------------
NET ASSETS..................................................................................... $180,867,660
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $181,065,844
Par value...................................................................................... 88,066
Accumulated net investment income (loss)....................................................... (38,267)
Accumulated net realized gain (loss) on investments............................................ 341,307
Net unrealized appreciation (depreciation) on investments...................................... (589,290)
------------
NET ASSETS..................................................................................... $180,867,660
============
MAXIMUM OFFERING PRICE PER SHARE:
(Net assets are rounded to the nearest whole dollar and shares are rounded to the nearest
full share)
CLASS A SHARES:
Net asset value and redemption price per share (Based on net assets of $53,303,653 and
2,595,216 shares of beneficial interest issued and outstanding)........................... $ 20.54
Maximum sales charge (3.50% of offering price).............................................. 0.74
------------
Maximum offering price to public............................................................ $ 21.28
============
CLASS C SHARES:
Net asset value and redemption price per share (Based on net assets of $24,530,571 and
1,195,244 shares of beneficial interest issued and outstanding)........................... $ 20.52
============
CLASS I SHARES:
Net asset value and redemption price per share (Based on net assets of $103,033,436 and
5,016,107 shares of beneficial interest issued and outstanding)........................... $ 20.54
============
See Notes to Financial Statements Page 21
FIRST TRUST SHORT DURATION HIGH INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2014
INVESTMENT INCOME:
Interest................................................................. $ 7,162,074
Other.................................................................... 192,333
-------------
Total investment income.................................................. 7,354,407
-------------
EXPENSES:
Investment advisory fees................................................. 970,070
12b-1 distribution and service fees
Class A............................................................... 151,185
Class C............................................................... 203,006
Administrative fees...................................................... 158,960
Transfer agent fees...................................................... 138,263
Registration and filing fees............................................. 119,841
Audit and tax fees....................................................... 61,655
Custodian fees........................................................... 60,407
Legal fees............................................................... 57,961
Printing fees............................................................ 49,670
Trustees' fees and expenses.............................................. 18,641
Commitment fees.......................................................... 13,452
Financial reporting fees................................................. 9,250
Other.................................................................... 22,837
-------------
Total expenses........................................................ 2,035,198
Less fees waived or expenses reimbursed by the investment advisor..... (188,551)
-------------
Net expenses............................................................. 1,846,647
-------------
NET INVESTMENT INCOME (LOSS)............................................. 5,507,760
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments............................... 404,020
Net change in unrealized appreciation (depreciation) on investments... (1,381,238)
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS).................................. (977,218)
-------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS....................................................... $ 4,530,542
=============
Page 22 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR PERIOD
ENDED ENDED
10/31/2014 10/31/2013 (a)
------------- -------------
OPERATIONS:
Net investment income (loss)............................................. $ 5,507,760 $ 1,268,556
Net realized gain (loss)................................................. 404,020 137,919
Net change in unrealized appreciation (depreciation)..................... (1,381,238) 791,948
Net increase from payment by the advisor (b)............................. -- 1,079
------------- -------------
Net increase (decrease) in net assets resulting from operations.......... 4,530,542 2,199,502
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A shares........................................................... (2,269,154) (539,225)
Class C shares........................................................... (603,979) (178,413)
Class I shares........................................................... (2,701,972) (729,306)
------------- -------------
(5,575,105) (1,446,944)
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM RETURN OF CAPITAL:
Class A shares........................................................... -- (130,315)
Class C shares........................................................... -- (43,112)
Class I shares........................................................... -- (176,224)
------------- -------------
-- (349,651)
------------- -------------
Total distributions to shareholders...................................... (5,575,105) (1,796,595)
------------- -------------
CAPITAL TRANSACTIONS:
Proceeds from shares sold................................................ 178,132,449 123,765,594
Proceeds from shares reinvested.......................................... 5,083,225 1,460,181
Cost of shares redeemed.................................................. (103,039,227) (23,892,906)
------------- -------------
Net increase (decrease) in net assets resulting from capital
transactions.......................................................... 80,176,447 101,332,869
------------- -------------
Total increase (decrease) in net assets................................. 79,131,884 101,735,776
NET ASSETS:
Beginning of period..................................................... 101,735,776 --
------------- -------------
End of period........................................................... $ 180,867,660 $ 101,735,776
============= =============
Accumulated net investment income (loss) at end of period............... $ (38,267) $ (33,505)
============= =============
-----------------------------
(a) The Fund was initially seeded and commenced operations on November 1, 2012.
(b) See Note 3 in the Notes to Financial Statements.
See Notes to Financial Statements Page 23
FIRST TRUST SHORT DURATION HIGH INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR PERIOD
ENDED ENDED
CLASS A SHARES 10/31/2014 10/31/2013 (a)
------------ --------------
Net asset value, beginning of period............. $ 20.68 $ 20.00
---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (b)................. 0.76 0.65
Net realized and unrealized gain (loss).......... (0.12) 0.90
---------- ----------
Total from investment operations................. 0.64 1.55
---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income............................ (0.78) (0.70)
Return of capital................................ -- (0.17)
---------- ----------
Total from distributions......................... (0.78) (0.87)
---------- ----------
Net asset value, end of period................... $ 20.54 $ 20.68
========== ==========
TOTAL RETURN (c)................................. 3.14% 7.87% (d)
========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............. $ 53,304 $ 44,819
Ratio of total expenses to average net assets.... 1.38% 1.54% (e)
Ratio of net expenses to average net assets...... 1.25% 1.25% (e)
Ratio of net investment income (loss) to average
net assets.................................... 3.68% 3.20% (e)
Portfolio turnover rate.......................... 109% 89%
(a) Class A Shares were initially seeded and commenced operations on November
1, 2012.
(b) Per share amounts have been calculated using the average shares method.
(c) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge of 3.50% or contingent
deferred sales charge (CDSC). On purchases of $1 million or more, a CDSC
of 1% may be imposed on certain redemptions made within twelve months of
purchase. If the sales charges were included, total returns would be
lower. These returns include Rule 12b-1 service fees of 0.25% and do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total returns would
have been lower if certain fees had not been waived and expenses
reimbursed by the investment advisor. Total return is calculated for the
time period presented and is not annualized for periods less than one
year.
(d) The Fund received reimbursements from First Trust Advisors L.P. (the
"Advisor") in the amount of $1,079. The reimbursements from the Advisor
represent less than $0.01 per share and had no effect on the total return
of the Class A Shares.
(e) Annualized.
Page 24 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR PERIOD
ENDED ENDED
CLASS C SHARES 10/31/2014 10/31/2013 (a)
------------ --------------
Net asset value, beginning of period............. $ 20.66 $ 20.00
---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (b)................. 0.60 0.50
Net realized and unrealized gain (loss).......... (0.11) 0.89
---------- ----------
Total from investment operations................. 0.49 1.39
---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income............................ (0.63) (0.59)
Return of capital................................ -- (0.14)
---------- ----------
Total from distributions......................... (0.63) (0.73)
---------- ----------
Net asset value, end of period................... $ 20.52 $ 20.66
========== ==========
TOTAL RETURN (c)................................. 2.38% 7.04% (d)
========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............. $ 24,531 $ 13,522
Ratio of total expenses to average net assets.... 2.13% 2.29% (e)
Ratio of net expenses to average net assets...... 2.00% 2.00% (e)
Ratio of net investment income (loss) to average
net assets.................................... 2.93% 2.45% (e)
Portfolio turnover rate.......................... 109% 89%
(a) Class C Shares were initially seeded and commenced operations on November
1, 2012.
(b) Per share amounts have been calculated using the average shares method.
(c) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 1%, charged on certain redemptions
made within one year of purchase. If the sales charge was included, total
return would be lower. These returns include combined Rule 12b-1
distribution and service fees of 1% and do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption
of Fund shares. The total returns would have been lower if certain fees
had not been waived and expenses reimbursed by the investment advisor.
Total return is calculated for the time period presented and is not
annualized for periods less than one year.
(d) The Fund received reimbursements from First Trust Advisors L.P. (the
"Advisor") in the amount of $1,079. The reimbursements from the Advisor
represent less than $0.01 per share and had no effect on the total return
of the Class C Shares.
(e) Annualized.
See Notes to Financial Statements Page 25
FIRST TRUST SHORT DURATION HIGH INCOME FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR PERIOD
ENDED ENDED
CLASS I SHARES 10/31/2014 10/31/2013 (a)
------------ --------------
Net asset value, beginning of period........... $ 20.68 $ 20.00
---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (b)............... 0.81 0.70
Net realized and unrealized gain (loss)........ (0.12) 0.90
---------- ----------
Total from investment operations............... 0.69 1.60
---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income.......................... (0.83) (0.74)
Return of capital.............................. -- (0.18)
---------- ----------
Total from distributions....................... (0.83) (0.92)
---------- ----------
Net asset value, end of period................. $ 20.54 $ 20.68
========== ==========
TOTAL RETURN (c)............................... 3.40% 8.11% (d)
========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........... $ 103,033 $ 43,395
Ratio of total expenses to average net assets.. 1.13% 1.29% (e)
Ratio of net expenses to average net assets.... 1.00% 1.00% (e)
Ratio of net investment income (loss) to average
net assets.................................. 3.93% 3.45% (e)
Portfolio turnover rate........................ 109% 89%
(a) Class I Shares were initially seeded and commenced operations on November
1, 2012.
(b) Per share amounts have been calculated using the average shares method.
(c) Assumes reinvestment of all distributions for the period. These returns do
not reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total returns would
have been lower if certain fees had not been waived and expenses
reimbursed by the investment advisor. Total return is calculated for the
time period presented and is not annualized for periods less than one
year.
(d) The Fund received reimbursements from First Trust Advisors L.P. (the
"Advisor") in the amount of $1,079. The reimbursements from the Advisor
represent less than $0.01 per share and had no effect on the total return
of the Class I Shares.
(e) Annualized.
Page 26 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2014
1. ORGANIZATION
First Trust Short Duration High Income Fund (the "Fund") is a series of the
First Trust Series Fund (the "Trust"), a Massachusetts business trust organized
on July 9, 2010, and is registered as a diversified open-end management
investment company with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund offers
three classes of shares: Class A, Class C and Class I. Each class represents an
interest in the same portfolio of investments but with a different combination
of sales charges, distribution and service (12b-1) fees, eligibility
requirements and other features.
The Fund's primary investment objective is to seek to provide a high level of
current income. As a secondary objective, the Fund seeks capital appreciation.
The Fund seeks to achieve its investment objectives by investing, under normal
market conditions, at least 80% of its net assets (plus the amount of any
borrowing for investment purposes) in high-yield debt securities and bank loans
that are rated below-investment grade or unrated. High-yield debt securities are
below-investment grade debt securities, commonly known as "junk bonds." For
purposes of determining whether a security is below-investment grade, the lowest
available rating is used. There can be no assurance that the Fund will achieve
its investment objectives. The Fund may not be appropriate for all investors.
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 ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") for each class of shares of the Fund is determined
daily as of the close of regular trading on The New York Stock Exchange
("NYSE"), normally 4:00 p.m. Eastern time, on each day the NYSE is open for
trading. If the NYSE closes early on a valuation day, the NAV is determined as
of that time. Domestic debt securities and foreign securities are priced using
data reflecting the earlier closing of the principal markets for those
securities. The NAV for each class is calculated by dividing the value of the
Fund's total assets attributable to such class (including accrued interest and
dividends), less all liabilities attributable to such class (including accrued
expenses, dividends declared but unpaid and any borrowings of the Fund), by the
total number of shares of the class outstanding. Differences in NAV of each
class of the Fund's shares are generally expected to be due to the daily expense
accruals of the specified distribution and service (12b-1) fees, if any, and
transfer agency costs applicable to such class of shares and the resulting
differential in the dividends that may be paid on each class of shares.
The Fund's investments are valued daily at market value or, in absence of market
value with respect to any portfolio securities, at fair value. Market value
prices represent last sale or official closing prices from a national or foreign
exchange (i.e. a regulated market) and are primarily obtained from third party
pricing services. Fair value prices represent any prices not considered market
value prices and are either obtained from a third party pricing service or are
determined by the Pricing Committee of the Trust's investment advisor, First
Trust Advisors L.P. ("First Trust" or the "Advisor") in accordance with
valuation procedures adopted by the Trust's Board of Trustees, and in accordance
with provisions of the 1940 Act. Investments valued by the Advisor's Pricing
Committee, if any, are footnoted as such in the footnotes to the Portfolio of
Investments. The Fund's investments are valued as follows:
The Senior Floating-Rate Loan Interests ("Senior Loans")1 in which the
Fund invests are not listed on any securities exchange or board of trade.
Senior Loans are typically bought and sold by institutional investors in
individually negotiated private transactions that function in many
respects like an over-the-counter secondary market, although typically no
formal market makers exist. This market, while having grown substantially
since its inception, generally has fewer trades and less liquidity than
the secondary market for other types of securities. Some Senior Loans have
few or no trades, or trade infrequently, and information regarding a
specific Senior Loan may not be widely available or may be incomplete.
Accordingly, determinations of the market value of Senior Loans may be
based on infrequent and dated information. Because there is less reliable,
objective data available, elements of judgment may play a greater role in
valuation of Senior Loans than for other types of securities. Typically,
Senior Loans are fair valued using information provided by a third-party
pricing service. The third-party pricing service primarily uses
over-the-counter pricing from dealer runs and broker quotes from
indicative sheets to value the Senior Loans.
Common stocks and other equity securities listed on any national or
foreign exchange (excluding The NASDAQ(R) Stock Market LLC ("NASDAQ") and
the London Stock Exchange Alternative Investment Market ("AIM")) are
valued at the last price on the exchange on which they are principally
traded or, for NASDAQ and AIM securities, the official closing price.
Securities traded on more than one securities exchange are valued at the
last sale price or official closing price, as applicable, at the close of
the securities exchange representing the principal market for such
securities.
-----------------------------
1 The terms "security" and "securities" used throughout the Notes to
Financial Statements include Senior Loans.
Page 27
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2014
Fixed income and other debt securities having a remaining maturity of 60
days or less when purchased are fair valued at cost adjusted for
amortization of premiums and accretion of discounts (amortized cost),
provided the Advisor's Pricing Committee has determined that the use of
amortized cost is an appropriate reflection of fair value given market and
issuer specific conditions existing at the time of the determination.
Factors that may be considered in determining the appropriateness of the
use of amortized cost include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes
thereto;
2) the liquidity conditions in the relevant market and changes
thereto;
3) the interest rate conditions in the relevant market and
changes thereto (such as significant changes in interest
rates);
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing
Committee may use last-obtained market-based data to assist it
when valuing portfolio securities using amortized cost.
Corporate bonds, notes and other debt securities are fair valued on the
basis of valuations provided by dealers who make markets in such
securities or by an independent pricing service approved by the Trust's
Board of Trustees, which may use the following valuation inputs when
available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Trust's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose
market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's fair value. As a general
principle, the current fair value of a security would appear to be the amount
which the owner might reasonably expect to receive for the security upon its
current sale. When fair value prices are used, generally they will differ from
market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the fundamental business data relating to the borrower/issuer;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of a security;
4) the financial statements of the borrower/issuer;
5) the credit quality and cash flow of the borrower/issuer, based on
the Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing
the security;
10) the business prospects of the borrower/issuer, including any ability
to obtain money or resources from a parent or affiliate and an
assessment of the borrower's/issuer's management;
11) the prospects for the borrower's/issuer's industry, and multiples
(of earnings and/or cash flows) being paid for similar businesses in
that industry;
12) borrower's/issuer's competitive position within the industry;
13) borrower's/issuer's ability to access additional liquidity through
public and/or private markets; and
14) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
Page 28
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2014
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodology used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of October 31, 2014, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
daily on the accrual basis. Market premiums and discounts are amortized over the
expected life of each respective borrowing. Amortization of premiums and the
accretion of discounts are recorded using the effective interest method.
Securities purchased or sold on a when-issued, delayed-delivery or forward
purchase commitment basis may have extended settlement periods. The value of the
security so purchased is subject to market fluctuations during this period. Due
to the nature of the Senior Loan market, the actual settlement date may not be
certain at the time of the purchase or sale for some of the Senior Loans.
Interest income on such Senior Loans is not accrued until settlement date. The
Fund maintains liquid assets with a current value at least equal to the amount
of its when-issued, delayed-delivery or forward purchase commitments. The Fund
did not have any when-issued, delayed-delivery or forward purchase commitments
(other than unfunded commitments discussed below) as of October 31, 2014.
C. UNFUNDED LOAN COMMITMENTS:
The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrower's discretion. The Fund had unfunded delayed draw loan commitments of
$14,516 as of October 31, 2014.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
The Fund will declare daily and pay monthly distributions of all or a portion of
its net income to holders of each class of shares. Distributions of any net
capital gains earned by the Fund will be distributed at least annually.
Distributions will automatically be reinvested into additional Fund shares
unless cash distributions are elected by the shareholder.
Distributions from net investment income and realized capital gains are
determined in accordance with income tax regulations, which may differ from U.S.
GAAP. Certain capital accounts in the financial statements are periodically
adjusted for permanent differences in order to reflect their tax character.
These permanent differences are primarily due to the varying treatment of income
and gain/loss on portfolio securities held by the Fund and have no impact on net
assets or net asset value per share. Temporary differences, which arise from
recognizing certain items of income, expense and gain/loss in different periods
for financial statement and tax purposes, will reverse at some point in the
future. Permanent differences incurred during the fiscal year ended October 31,
2014, primarily as a result of differing book/tax treatment on recognition of
amortization/accretion on portfolio holdings, have been reclassified at year end
to reflect an increase in accumulated net investment income (loss) by $62,583,
and a decrease in accumulated net realized gain (loss) on investments by
$62,583. Net assets were not affected by this reclassification.
The tax character of distributions paid during the fiscal periods ended October
31, 2014, and 2013, was as follows:
Distributions paid from: 2014 2013
Ordinary income............................ $ 5,575,105 $ 1,446,944
Capital gain............................... -- --
Return of capital.......................... -- 349,651
Page 29
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2014
As of October 31, 2014, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income................ $ 388,732
Undistributed capital gains.................. 103,032
------------
Total undistributed earnings................. 491,764
Accumulated capital and other losses......... --
Net unrealized appreciation (depreciation)... (778,014)
------------
Total accumulated earnings (losses).......... (286,250)
Other........................................ --
Paid-in capital.............................. 181,153,910
------------
Net assets................................... $180,867,660
============
E. 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. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At October 31, 2014, the
Fund had no non-expiring capital loss carryforwards for federal income tax
purposes.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ended 2013 and 2014
remain open to federal and state audit. As of October 31, 2014, management has
evaluated the application of these standards to the Fund and has determined that
no provision for income tax is required in the Fund's financial statements for
uncertain tax positions.
F. EXPENSES:
The Fund will pay all expenses directly related to its operations. Expenses of
the Fund are allocated on a pro rata basis to each class of shares, except for
distribution and service (12b-1) fees and incremental transfer agency costs
which are unique to each class of shares.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 0.65% of the Fund's average daily net assets.
First Trust also provides fund reporting services to the Fund for a flat annual
fee in the amount of $9,250.
First Trust has agreed to waive fees and/or pay Fund expenses to the extent
necessary to prevent the annual operating expenses of the Fund (excluding 12b-1
distribution and service fees, interest expenses, taxes, fees incurred in
acquiring and disposing of portfolio securities and extraordinary expenses) from
exceeding 1.00% of average daily net assets of any class of shares of the Fund
(the "Expense Cap") until February 28, 2016, and then will not exceed 1.35% from
March 1, 2016, through February 28, 2025 (the "Expense Cap Termination Date").
Expenses borne and fees waived by First Trust are subject to recovery by First
Trust up to three years from the date the fee was waived or expense was
incurred, but no reimbursement payment will be made by the Fund at any time if
it would result in the Fund's expenses exceeding the Expense Cap in place at the
time the expense was borne or the fee was waived by First Trust. These amounts
would be included in "Expenses previously waived or reimbursed" on the Statement
of Operations. The advisory fee waivers and expense reimbursement for the year
ended October 31, 2014, and the expenses borne by First Trust subject to
recovery were as follows:
EXPENSES SUBJECT TO RECOVERY
------------------------------------------------
PERIOD ENDED YEAR ENDED
ADVISORY EXPENSE OCTOBER 31, OCTOBER 31,
FEE WAIVER REIMBURSEMENT 2013 2014 TOTAL
------------ ------------ ------------ ------------ ------------
$188,551 $ -- $116,236 $188,551 $304,787
During the period ended October 31, 2013, the Fund received reimbursements from
the Advisor of $1,079 in connection with trade errors.
Page 30
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2014
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
administrator, fund accountant and transfer agent in accordance with certain fee
arrangements. As administrator and fund accountant, BNYM IS is responsible for
providing certain administrative and accounting services to the Fund, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records. As transfer agent, BNYM IS is
responsible for maintaining shareholder records for the Fund. The Bank of New
York Mellon ("BNYM") serves as the Fund's custodian in accordance with certain
fee arrangements. As custodian, BNYM is responsible for custody of the Fund's
assets.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated pro rata among each fund in the First Trust Fund
Complex based on net assets. Each Independent Trustee is also paid an annual per
fund fee that varies based on whether the fund is a closed-end or other actively
managed fund, or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Trustees are reimbursed for travel and out-of-pocket expenses in connection with
all meetings. The Lead Independent Trustee and Committee Chairmen rotate every
three years. The officers and "Interested" Trustee receive no compensation from
the Trust for acting in such capacities.
4. CAPITAL SHARE TRANSACTIONS
Capital transactions were as follows:
YEAR ENDED PERIOD ENDED
OCTOBER 31, 2014 OCTOBER 31, 2013
SHARES VALUE SHARES VALUE
---------- ------------- ---------- -------------
Sales:
Class A 3,492,215 $ 71,976,299 2,538,555 $ 52,251,481
Class C 687,294 14,196,208 749,163 15,352,331
Class I 4,450,496 91,959,942 2,722,812 56,161,782
---------- ------------- ---------- -------------
Total Sales: 8,630,005 $ 178,132,449 6,010,530 $ 123,765,594
========== ============= ========== =============
Dividend Reinvestment:
Class A 103,831 $ 2,146,681 26,220 $ 539,817
Class C 24,663 509,005 6,484 133,381
Class I 117,616 2,427,539 38,242 786,983
---------- ------------- ---------- -------------
Total Dividend Reinvestment: 246,110 $ 5,083,225 70,946 $ 1,460,181
========== ============= ========== =============
Redemptions
Class A (3,168,303) $ (65,511,197) (397,300) $ (8,170,096)
Class C (171,124) (3,533,429) (101,237) (2,087,628)
Class I (1,650,504) (33,994,601) (662,556) (13,635,182)
---------- ------------- ---------- -------------
Total Redemptions: (4,989,931) $(103,039,227) (1,161,093) $ (23,892,906)
========== ============= ========== =============
5. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investments, excluding short-term
investments, for the year ended October 31, 2014, were $228,615,076 and
$156,672,026, respectively.
6. BORROWINGS
Effective March 28, 2013, the Trust and First Trust Variable Insurance Trust
entered into a $20 million Committed Line of Credit ("Line of Credit") with The
Bank of Nova Scotia ("Scotia") to be a liquidity backstop during periods of high
redemption volume. On July 30, 2013, the Line of Credit was increased to $50
million and First Trust Exchange-Traded Fund III and First Trust Exchange-Traded
Fund IV were added to the Credit Agreement. A commitment fee of 0.125% of the
daily amount of the excess of the commitment amount over the outstanding
principal balance of the loans was charged by Scotia, which First Trust
allocated amongst the funds that had access to the Line of Credit. To the extent
that the Fund accessed the Line of Credit, there would also be an interest fee
charged.
Page 31
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2014
The Line of Credit terminated on March 27, 2014. Effective March 27, 2014, the
Trust, on behalf of the Fund, along with First Trust Variable Insurance Trust
and First Trust Exchange-Traded Fund IV, entered into a $30 million Credit
Agreement (the "BNYM Line of Credit") with BNYM to be a liquidity backstop
during periods of high redemption volume. A commitment fee of 0.15% of the daily
amount of the excess of the commitment amount over the outstanding principal
balance of the loans will be charged by BNYM, which First Trust will allocate
amongst the funds that have access to the BNYM Line of Credit. To the extent
that the Fund accesses the BNYM Line of Credit, there would also be an interest
fee charged. As of October 31, 2014, the Fund did not have any outstanding
borrowings under the Line of Credit.
7. DISTRIBUTION AND SERVICE PLAN
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the share
classes of the Fund are authorized to pay an amount up to 0.25% and 1.00% of
their average daily net assets each year for Class A and Class C, respectively,
to reimburse and compensate First Trust Portfolios L.P. ("FTP"), the distributor
of the Fund, for amounts expended to finance activities primarily intended to
result in the sale of Fund shares or the provision of investor services. FTP may
also use this amount to compensate securities dealers or other persons for
providing distribution assistance, including broker-dealer and shareholder
support and educational and promotional services.
8. 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.
9. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there
were no subsequent events requiring recognition or disclosure in the financial
statements that have not already been disclosed.
Page 32
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST SHORT DURATION HIGH
INCOME FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust Short Duration High Income Fund (the "Fund"), a series of the First Trust
Series Fund, including the portfolio of investments, as of October 31, 2014, and
the related statement of operations for the year then ended, and the statements
of changes in net assets and the financial highlights for each of the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
The Fund is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of October 31, 2014 by correspondence with the Fund's
custodian, brokers, and agent banks; where replies were not received, we
performed other auditing procedures. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Trust Short Duration High Income Fund as of October 31, 2014, and the results of
its operations for the year then ended, and the changes in its net assets and
the financial highlights for each of the periods presented, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
December 23, 2014
Page 33
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2014 (UNAUDITED)
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Trust uses to determine
how to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website at http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Trust'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.
TAX INFORMATION
Of the ordinary income (including short-term capital gain, if applicable)
distributions made by the Fund during the period ended October 31, 2014, none
qualify for the corporate dividends received deduction available to corporate
shareholders or as qualified dividend income.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some, but not all,
of the risks that should be considered for the Fund. For additional information
about the risks associated with investing in the Fund, please see the Fund's
prospectus and statement of additional information, as well as other Fund
regulatory filings.
HIGH-YIELD SECURITIES RISK: High-yield securities, or "junk bonds," are subject
to greater market fluctuations and risk of loss than securities with higher
investment ratings. These securities are issued by companies that may have
limited operating history, narrowly focused operations, and/or other impediments
to the timely payment of periodic interest and principal at maturity. If the
economy slows down or dips into recession, the issuers of high-yield securities
may not have sufficient resources to continue making timely payment of periodic
interest and principal at maturity. The market for high-yield securities is
smaller and less liquid than that for investment grade securities. High-yield
securities are generally not listed on a national securities exchange but trade
in the over-the-counter markets. Due to the smaller, less liquid market for
high-yield securities, the bid-offer spread on such securities is generally
greater than it is for investment grade securities and the purchase or sale of
such securities may take longer to complete.
CREDIT RISK: Credit risk is the risk that an issuer of a security may be unable
or unwilling to make dividend, interest and principal payments when due and the
related risk that the value of a security may decline because of concerns about
the issuer's ability or willingness to make such payments. Credit risk may be
heightened for the Fund because it invests a substantial portion of its net
assets in high-yield or "junk" debt; such securities, while generally offering
higher yields than investment grade debt with similar maturities, involve
greater risks, including the possibility of dividend or interest deferral,
default or bankruptcy, and are regarded as predominantly speculative with
respect to the issuer's capacity to pay dividends or interest and repay
principal. Credit risk is heightened for loans in which the Fund invests because
companies that issue such loans tend to be highly leveraged and thus are more
susceptible to the risks of interest deferral, default and/or bankruptcy.
INTEREST RATE RISK: Interest rate risk is the risk that the value of the debt
securities held by the Fund will decline because of rising market interest
rates. Interest rate risk is generally lower for shorter term investments and
higher for longer term investments. Duration is a common measure of interest
rate risk, which measures a bond's expected life on a present value basis,
taking into account the bond's yield, interest payments and final maturity.
Duration is a reasonably accurate measure of a bond's price sensitivity to
changes in interest rates. The longer the duration of a bond, the greater the
bond's price sensitivity is to changes in interest rates.
MARKET RISK: Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory
or market developments, changes in interest rates and perceived trends in stock
prices. Overall stock values could decline generally or could underperform other
investments.
BANK LOANS RISK: An investment in bank loans subjects the Fund to credit risk,
which is heightened for loans in which the Fund invests because companies that
issue such loans tend to be highly leveraged and thus are more susceptible to
the risks of interest deferral, default and/or bankruptcy. Senior floating rate
loans, in which the Fund invests, are usually rated below-investment grade but
may also be unrated. As a result, the risks associated with these loans are
similar to the risks of below-investment grade fixed income instruments. An
economic downturn would generally lead to a higher non-payment rate, and a
senior floating rate loan may lose significant market value before a default
occurs. Moreover, any specific collateral used to secure a senior floating rate
loan may decline in value or become illiquid, which would adversely affect the
Page 34
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2014 (UNAUDITED)
loan's value. Unlike the securities markets, there is no central clearinghouse
for loan trades, and the loan market has not established enforceable settlement
standards or remedies for failure to settle. Therefore, portfolio transactions
in loans may have uncertain settlement time periods. Senior floating rate loans
are subject to a number of risks described elsewhere in this Prospectus,
including liquidity risk and the risk of investing in below-investment grade
fixed income instruments.
LIQUIDITY RISK: The Fund invests a substantial portion of its assets in
lower-quality debt issued by companies that are highly leveraged. Lower-quality
debt tends to be less liquid than higher-quality debt. Moreover, smaller debt
issues tend to be less liquid than larger debt issues. If the economy
experiences a sudden downturn, or if the debt markets for such companies become
distressed, the Fund may have particular difficulty selling its assets in
sufficient amounts, at reasonable prices and in a sufficiently timely manner to
raise the cash necessary to meet any potentially heavy redemption requests by
Fund shareholders.
CONVERTIBLE BONDS RISK: The market values of convertible bonds tend to decline
as interest rates increase and, conversely, to increase as interest rates
decline. A convertible bond's market value also tends to reflect the market
price of the common stock of the issuing company.
NON-U.S. SECURITIES RISK: Non-U.S. securities are subject to higher volatility
than securities of domestic issuers due to possible adverse political, social or
economic developments; restrictions on foreign investment or exchange of
securities; lack of liquidity; currency exchange rates; excessive taxation;
government seizure of assets; different legal or accounting standards; and less
government supervision and regulation of exchanges in foreign countries.
CURRENCY RISK: Because the Fund's net asset value ("NAV") is determined on the
basis of U.S. dollars and the Fund invests in foreign securities, you may lose
money if the local currency of a foreign market depreciates against the U.S.
dollar, even if the local currency value of the Fund's holdings goes up.
PREPAYMENT RISK: Loans and other fixed income investments are subject to
prepayment risk. The degree to which borrowers prepay loans, whether as a
contractual requirement or at their election, may be affected by general
business conditions, the financial condition of the borrower and competitive
conditions among loan investors, among others. As such, prepayments cannot be
predicted with accuracy. Upon a prepayment, either in part or in full, the
actual outstanding debt on which the Fund derives interest income will be
reduced. The Fund may not be able to reinvest the proceeds received on terms as
favorable as the prepaid loan.
INCOME RISK: If interest rates fall, the income from the Fund's portfolio may
decline as the Fund generally holds floating rate debt that will adjust lower
with falling interest rates. For loans, interest rates typically reset every 30
to 90 days.
NEW FUND RISK: The Fund currently has less assets than larger funds, and like
other relatively small funds, large inflows and outflows may impact the Fund's
market exposure for limited periods of time. This impact may be positive or
negative, depending on the direction of market movement during the period
affected.
MANAGEMENT RISK: The Fund is subject to management risk because it is an
actively managed portfolio. In managing the Fund's investment portfolio, the
Advisor will apply investment techniques and risk analyses that may not have the
desired result. There can be no guarantee that the Fund will meet its investment
objectives.
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AGREEMENT
The Board of Trustees of the First Trust Series Fund (the "Trust"), including
the Independent Trustees, unanimously approved the continuation of the
Investment Management Agreement (the "Agreement") between the Trust, on behalf
of the First Trust Short Duration High Income Fund (the "Fund"), and First Trust
Advisors L.P. (the "Advisor" or "First Trust") at a meeting held on June 8-9,
2014. The Board of Trustees determined that the continuation of the Agreement is
in the best interests of the Fund in light of the extent and quality of the
services provided and such other matters as the Board considered to be relevant
in the exercise of its reasonable business judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. To assist the Board in its evaluation of the Agreement, the
Independent Trustees received a report from the Advisor in advance of the Board
meeting responding to a request for information from counsel to the Independent
Trustees. The report, among other things, outlined the services provided by the
Advisor (including the relevant personnel responsible for these services and
their experience); the advisory fee for the Fund as compared to fees charged to
other clients of the Advisor and as compared to fees charged by investment
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; any fall out benefits to the Advisor and its affiliate, First Trust
Page 35
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2014 (UNAUDITED)
Portfolios L.P. ("FTP"); and information on the Advisor's compliance program.
Following receipt of this information, counsel to the Independent Trustees posed
follow-up questions to the Advisor, and the Independent Trustees and their
counsel met separately to discuss the information provided by the Advisor,
including the supplemental responses. The Board applied its business judgment to
determine whether the arrangement between the Trust and the Advisor is a
reasonable business arrangement from the Fund's perspective as well as from the
perspective of shareholders. The Board considered that shareholders chose to
invest or remain invested in the Fund knowing that the Advisor manages the Fund.
In reviewing the Agreement, the Board considered the nature, extent and quality
of services provided by the Advisor under the Agreement. The Board considered
that the Advisor is responsible for the overall management and administration of
the Fund and reviewed the services provided by the Advisor to the Fund, noting
that the Advisor's Leveraged Finance Investment Team is responsible for
day-to-day management of the Fund's investments. The Board considered that the
Advisor applies the same oversight model internally with its Leveraged Finance
Investment Team as it uses for overseeing external sub-advisors. The Board
considered the background and experience of the members of the Leveraged Finance
Investment Team. At the meeting, the Board received a presentation from members
of the Leveraged Finance Investment Team, who discussed the services that the
Team provides to the Fund and how the Team manages the Fund's investments. The
Board noted the compliance program that had been developed by the Advisor and
considered that it includes a robust program for monitoring compliance with the
1940 Act and the Fund's investment objectives and policies. In light of the
information presented and the considerations made, the Board concluded that the
nature, extent and quality of services provided to the Fund by the Advisor under
the Agreement remain satisfactory and that the Advisor has managed the Fund
consistent with its investment objectives and policies.
The Board considered the advisory fees paid under the Agreement. The Board
considered the advisory fees charged by the Advisor to similar funds and other
non-fund clients, noting that the Advisor does not provide advisory services to
other funds that have investment objectives and policies similar to the Fund's,
but does provide services to certain separately managed accounts that may have
investment objectives and policies similar to the Fund's. The Board noted that
the Advisor charges a lower advisory fee rate to the separately managed
accounts, as well as the Advisor's statement that the nature of the services
provided to the separately managed accounts is not comparable to those provided
to the Fund. The Board reviewed data prepared by Lipper Inc. ("Lipper"), an
independent source, showing the advisory fee and expense ratios of the Fund as
compared to the advisory fees and expense ratios of an expense peer group
selected by Lipper and similar data from the Advisor for a separate peer group
selected by the Advisor. The Board noted that the Lipper and Advisor peer groups
included only one overlapping peer fund. The Board discussed with
representatives of the Advisor the limitations in creating a relevant peer group
for the Fund, including that most of the Lipper peer funds are primarily
high-yield bond funds that do not have a short duration mandate, while the
Advisor peer group funds also invest in senior loans. The Board took these
limitations into account in considering the peer data. In reviewing the peer
data, the Board noted that the Fund's contractual advisory fee was above the
median of the Lipper peer group. The Board considered that the Advisor agreed to
waive fees and/or pay Fund expenses through February 28, 2016 to the extent
necessary to prevent the annual operating expenses of the Fund (excluding taxes,
interest, brokerage commissions and other normal charges incident to the
purchase and sale of portfolio securities, distribution and service fees payable
pursuant to a Rule 12b 1 plan, if any, and extraordinary expenses) from
exceeding 1.00% of a class' average daily net assets, and from March 1, 2016
through February 28, 2025 to the extent necessary to prevent annual operating
expenses (with the same exclusions) from exceeding 1.35% of a class' average
daily net assets. The Board noted that fees waived or expenses borne by the
Advisor are subject to reimbursement by the Fund for up to three years from the
date the fee was waived or the expense was incurred, but no reimbursement
payment would be made by the Fund if it would result in the Fund exceeding an
expense ratio equal to the expense cap in place at the time the fees were waived
or the expenses was borne by the Advisor.
The Board also considered the 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 and portfolio risk on an ongoing basis. 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 (based on
Class A shares) for the one-year and since-inception periods ended December 31,
2013 to a performance peer universe selected by Lipper and to a benchmark. In
reviewing the Fund's performance as compared to the performance of the Lipper
performance peer universe, the Board took into account the limitations described
above with respect to creating a relevant peer group for the Fund. The Board
also considered the Fund's dividend yield as of March 31, 2014. Based on the
information presented, the Board noted that the Fund's performance was above the
median of the Lipper peer universe for the one-year and since-inception periods
ended December 31, 2013.
On the basis of all the information provided on the fees, expenses and
performance of the Fund, the Board concluded that the advisory fee was
reasonable and appropriate in light of the nature, extent and quality of
services provided by the Advisor under the Agreement.
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 noted the Advisor's statement that
economies of scale in providing services to the Fund are not available at
current asset levels. The Board also considered the costs of the services
provided and any profits realized by the Advisor from serving as investment
Page 36
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2014 (UNAUDITED)
advisor to the Fund for the twelve months ended December 31, 2013, as well as
product-line profitability data for the same period, as set forth in the
materials provided to the Board. The Board noted the inherent limitations in the
profitability analysis, and considered that the Advisor estimated that the Fund
was not profitable for the Advisor. In addition, the Board considered fall-out
benefits described by the Advisor that may be realized from its relationship
with the Fund. The Board noted that in addition to the advisory fees paid by the
Fund, FTP is compensated for services provided to the Fund through 12b 1 fees
and that First Trust also is compensated for providing fund reporting services
to the Fund. The Board noted that the Advisor does not maintain any soft-dollar
arrangements.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreement continue to be fair and reasonable and that the continuation of
the Agreement is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 37
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2014 (UNAUDITED)
The Trust's statement of additional information includes additional information
about the Trustees and is available, without charge, upon request, by calling
(800) 988-5891.
NUMBER OF OTHER
PORTFOLIOS IN TRUSTEESHIPS OR
THE FIRST TRUST DIRECTORSHIPS
NAME, ADDRESS, TERM OF OFFICE FUND COMPLEX HELD BY TRUSTEE
DATE OF BIRTH AND AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE TRUST SERVICE DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Indefinite Term Physician; President, Wheaton Orthopedics; 111 None
c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate
120 East Liberty Drive, o Since Trust Limited Partnership; Member, Sportsmed
Suite 400 Inception LLC
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Indefinite Term President (March 2010 to Present), Senior 111 Director of ADM
c/o First Trust Advisors L.P. Vice President and Chief Financial Officer Investor Services,
120 East Liberty Drive, o Since Trust (May 2007 to March 2010), ADM Investor Inc., ADM
Suite 400 Inception Services, Inc. (Futures Commission Investor Services
Wheaton, IL 60187 Merchant) International, and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Indefinite Term President (2003 to Present), Hibs 111 Director of Trust
c/o First Trust Advisors L.P. Enterprises (Financial and Management Company of
120 East Liberty Drive, o Since Trust Consulting) Illinois
Suite 400 Inception
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Indefinite Term Managing Director and Chief Operating 111 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant
120 East Liberty Drive, o Since Trust Harapan Educational Foundation Transport, Inc.
Suite 400 Inception (Educational Products and Services); (May 2003 to
Wheaton, IL 60187 President and Chief Executive Officer May 2014)
D.O.B.: 03/54 (June 2012 to September 2014), Servant
Interactive LLC (Educational Products and
Services); President and Chief Executive
Officer (June 2012 to September 2014), Dew
Learning LLC (Educational Products and
Services); President (June 2002 to June 2012),
Covenant College
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee, o Indefinite Term Chief Executive Officer (December 2010 to 111 None
Chairman of the Board Present), President (until December 2010),
120 East Liberty Drive, o Since Trust First Trust Advisors L.P. and First Trust
Suite 400 Inception Portfolios L.P.; Chairman of the Board of
Wheaton, IL 60187 Directors, BondWave LLC (Software
D.O.B.: 09/55 Development Company/Investment Advisor
and Stonebridge Advisors LLC (Investment
Advisor)
-------------------
(1) Mr. Bowen is deemed an "interested person" of the Trust due to his
position as Chief Executive Officer of First Trust Advisors L.P.,
investment advisor of the Trust.
Page 38
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2014 (UNAUDITED)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH TRUST LENGTH OF SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(2)
------------------------------------------------------------------------------------------------------------------------------------
Mark R. Bradley President and Chief o Indefinite Term Chief Operating Officer (December 2010 to Present)
120 E. Liberty Drive, Executive Officer and Chief Financial Officer, First Trust Advisors
Suite 400 o Since Trust Inception L.P. and First Trust Portfolios L.P.; Chief Financial
Wheaton, IL 60187 Officer, BondWave LLC (Software Development
D.O.B.: 11/57 Company/Investment Advisor) and Stonebridge
Advisors LLC (Investment Advisor)
James M. Dykas Treasurer, Chief Financial o Indefinite Term Controller (January 2011 to Present), Senior Vice
120 E. Liberty Drive, Officer and Chief President (April 2007 to Present), First Trust
Suite 400 Accounting Officer o Since Trust Inception Advisors L.P. and First Trust Portfolios L.P.
Wheaton, IL 60187
D.O.B.: 01/66
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P., First
120 E. Liberty Drive, Legal Officer Trust Portfolios L.P.; Secretary, BondWave LLC
Suite 400 o Since Trust Inception (Software Development Company/Investment
Wheaton, IL 60187 Advisor) and Stonebridge Advisors LLC
D.O.B.: 05/60 (Investment Advisor)
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present), Senior
120 E. Liberty Drive, Vice President (September 2005 to July 2012),
Suite 400 o Since Trust Inception First Trust Advisirs L.P. and First Trust Portfolios
Wheaton, IL 60187 L.P.
D.O.B.: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust Advisors
120 E. Liberty Drive, and Assistant Secretary L.P. and First Trust Portfolios L.P.
Suite 400 o Chief Compliance
Wheaton, IL 60187 Officer since January
D.O.B.: 12/66 2011
o Assistant Secretary
since Trust Inception
-------------------
(2) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 39
--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2014 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and considers your privacy an
important priority in maintaining that relationship. We are committed to
protecting the security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies".
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information within First Trust.
PRIVACY ONLINE
We allow third-party companies, including AddThis (a social media sharing
service), to collect certain anonymous information when you visit our website.
These companies may use non-personally identifiable information during your
visits to this and other websites in order to provide advertisements about goods
and services likely to be of greater interest to you. These companies typically
use a cookie, third party web beacon or pixel tags, to collect this information.
To learn more about this behavioral advertising practice, you can visit
www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, First Trust restricts access to
your nonpublic personal information to those First Trust employees who need to
know that information to provide products or services to you. We maintain
physical, electronic and procedural safeguards to protect your nonpublic
personal information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
Page 40
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report, has
adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions, regardless
of whether these individuals are employed by the registrant or a third
party.
(c) There have been no amendments, during the period covered by this report,
to a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or
a third party, and that relates to any element of the code of ethics
description.
(d) The registrant has not granted any waivers, including an implicit waiver,
from a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or
a third party, that relates to one or more of the items set forth in
paragraph (b) of this item's instructions.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the Registrant's Board of
Trustees has determined that Thomas R. Kadlec and Robert F. Keith are qualified
to serve as audit committee financial experts serving on its audit committee and
that each of them is "independent," as defined by Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees (Registrant) -- The aggregate fees billed for professional
services rendered by the principal accountant for the audit of the
registrant's annual financial statements or services that are normally
provided by the accountant in connection with statutory and regulatory
filings or engagements were $105,000 for 2013 and $112,500 for 2014.
Audit Fees (Investment Advisor and Distributor) -- The aggregate fees
billed for professional services rendered by the principal accountant for
the audit of the registrant's annual financial statements or services that
are normally provided by the accountant in connection with statutory and
regulatory filings or engagements were $0 for 2013 and $0 for 2014.
(b) Audit-Related Fees (Registrant) -- The aggregate fees billed in each of
the last two fiscal years for assurance and related services by the
principal accountant that are reasonably related to the performance of the
audit of the registrant's financial statements and are not reported under
paragraph (a) of this Item were $0 for 2013 and $0 for 2014.
Audit-Related Fees (Investment Adviser and Distributor) -- The aggregate
fees billed for assurance and related services by the principal accountant
that are reasonably related to the performance of the audit of the
registrant's financial statements, including conducting the seed audit and
preparation of the seed audit consent, and are not reported under
paragraph (a) of this Item were $0 for the Investment Adviser and $0 for
the Distributor for 2013 and $0 for the Investment Adviser and $0 for the
Distributor 2014.
(c) Tax Fees (Registrant) -- The aggregate fees billed for professional
services rendered by the principal accountant for tax compliance, tax
advice, and tax planning to the registrant were $10,000 for 2013 and
$15,200 for 2014.
Tax Fees (Investment Adviser and Distributor) -- The aggregate fees billed
for professional services rendered by the principal accountant for tax
compliance, tax advice, and tax planning to the registrant's adviser and
distributor were $0 for the Investment Adviser and $0 for the Distributor
for 2013 and $0 for the Investment Adviser and $0 for the Distributor
2014.
(d) All Other Fees (Registrant) -- The aggregate fees billed for products and
services provided by the principal accountant to the registrant, other
than the services reported in paragraphs (a) through (c) of this Item were
$0 for 2013 and $0 for 2014.
All Other Fees (Investment Adviser and Distributor) -- The aggregate fees
billed for products and services provided by the principal accountant to
the registrant's investment adviser and distributor, other than the
services reported in paragraphs (a) through (c) of this Item were $0 for
the Investment Adviser and $0 for the Distributor for 2013 and $0 for the
Investment Adviser and $0 for the Distributor for 2014.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c) (7) of Rule 2-01 of Regulation S-X.
Pursuant to its charter and its Audit and Non-Audit Services Pre-Approval
Policy, the Audit Committee (the "Committee") is responsible for the
pre-approval of all audit services and permitted non-audit services (including
the fees and terms thereof) to be performed for the registrant by its
independent auditors. The Chairman of the Committee is authorized to give such
pre-approvals on behalf of the Committee up to $25,000 and report any such
pre-approval to the full Committee.
The Committee is also responsible for the pre-approval of the independent
auditor's engagements for non-audit services with the registrant's adviser (not
including a sub-adviser whose role is primarily portfolio management and is
sub-contracted or overseen by another investment adviser) and any entity
controlling, controlled by or under common control with the investment adviser
that provides ongoing services to the registrant, if the engagement relates
directly to the operations and financial reporting of the registrant, subject to
the de minimis exceptions for non-audit services described in Rule 2-01 of
Regulation S-X. If the independent auditor has provided non-audit services to
the registrant's adviser (other than any sub-adviser whose role is primarily
portfolio management and is sub-contracted with or overseen by another
investment adviser) and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to its policies, the Committee
will consider whether the provision of such non-audit services is compatible
with the auditor's independence.
(e)(2) The percentage of services described in each of paragraphs (b) through
(d) for the registrant and the registrant's investment adviser and
distributor of this Item that were approved by the audit committee
pursuant to the pre-approval exceptions included in paragraph
(c)(7)(i)(C) or paragraph(C)(7)(ii) of Rule 2-01 of Regulation S-X are as
follows:
Registrant: Adviser and Distributor:
----------- ------------------------
(b) 0% (b) 0%
(c) 0% (c) 0%
(d) 0% (d) 0%
(f) The percentage of hours expended on the principal accountant's engagement
to audit the registrant's financial statements for the most recent fiscal
year that were attributed to work performed by persons other than the
principal accountant's full-time, permanent employees was less than fifty
percent.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under
common control with the adviser that provides ongoing services to the
registrant were $10,000 for the registrant, $3,000 for the registrant's
investment adviser, $3,000 for the registrant's sub-advisor and $60,600
for the registrant's distributor for 2013 and $15,200 for the registrant,
$43,500 for the registrant's investment adviser, $3,000 for the
registrant's sub-advisor and $36,000 for the registrant's distributor for
2014.
(h) The registrant's audit committee of its Board of Trustees has determined
that the provision of non-audit services that were rendered to the
registrant's investment adviser (not including any sub-adviser whose role
is primarily portfolio management and is subcontracted with or overseen by
another investment adviser), and any entity controlling, controlled by, or
under common control with the investment adviser that provides ongoing
services to the registrant that were not pre-approved pursuant to
paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with
maintaining the principal accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The Registrant has a separately designated audit committee consisting of
all the independent directors of the Registrant. The members of the audit
committee are: Thomas R. Kadlec, Niel B. Nielson, Richard E. Erickson and
Robert F. Keith.
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.
Not applicable.
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 directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR
270.30a-3(c))) are effective, as of a date within 90 days of the filing
date of the report that includes the disclosure required by this
paragraph, based on their evaluation of these controls and procedures
required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and
Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as
amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the 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) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(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 Series Fund
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By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: December 23, 2014
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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/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: December 23, 2014
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By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: December 23, 2014
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* Print the name and title of each signing officer under his or her signature.