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, 2015
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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
-----------------------------------------
Annual Report
For the Year Ended October 31, 2015
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, 2015
Shareholder Letter .......................................................... 1
At a Glance ................................................................. 2
Portfolio Commentary ........................................................ 4
Understanding Your Fund Expenses ............................................ 6
Portfolio of Investments .................................................... 7
Statement of Assets and Liabilities ......................................... 12
Statement of Operations ..................................................... 13
Statements of Changes in Net Assets ......................................... 14
Financial Highlights ........................................................ 15
Notes to Financial Statements ............................................... 20
Report of Independent Registered Public Accounting Firm ..................... 27
Additional Information ...................................................... 28
Board of Trustees and Officers .............................................. 32
Privacy Policy .............................................................. 34
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.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's webpage at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. It includes details about the Fund's portfolio and presents data and
analysis that provide insight into the Fund's performance and investment
approach.
By reading the portfolio commentary from 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 the portfolio
management team are just that: informed opinions. They should not be considered
to be promises or advice. The opinions, like the statistics, cover the period
through the date on the cover of this report. The material risks of investing in
the Fund are spelled out in its prospectus, 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, 2015
Dear Shareholders:
Thank you for your investment in First Trust Preferred Securities and Income
Fund (the "Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
annual report which contains detailed information about your investment for the
12 months ended October 31, 2015, including a market overview and a performance
analysis for the period. We encourage you to read this report and discuss it
with your financial advisor.
U.S. markets, fueled by accelerating growth and an accommodating Federal
Reserve, enjoyed a prosperous year in 2014. However, most of 2015 has been
volatile. Economic and global factors, such as the continued conflict in the
Middle East, a sharp decline in oil prices and terrorism around the world, have
impacted U.S. and global markets. Another factor that has weighed upon U.S.
markets for most of the year is the fact that many economists had predicted that
the Federal Reserve would begin to raise interest rates in 2015, which has still
not happened.
As I have written previously, First Trust believes investors should maintain
perspective about the markets and have realistic expectations about their
investments. Markets will always go up and down, but we believe that having a
long-term investment horizon and being invested in quality products can help you
reach your goals.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value the relationship and will continue to focus on our disciplined
investment approach and long-term perspective to help investors reach their
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, 2015 (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) $21.13
Class C (FPECX) $21.17
Class F (FPEFX) $21.31
Class I (FPEIX) $21.21
Class R3 (FPERX) $21.13
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% OF TOTAL
TOP TEN HOLDINGS INVESTMENTS
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Liberty Mutual Group, Inc. 3.1%
Aquarius + Investments PLC for Swiss
Reinsurance Co., Ltd. 2.8
Farm Credit Bank of Texas, Series 1 2.6
Land O'Lakes Capital Trust I 2.4
Friends Life Holdings PLC 2.3
General Electric Capital Corp., Series A 2.2
CoBank ACB, Series F 2.1
Lloyds Bank PLC 2.0
CHS, Inc., Series 2 2.0
Bank of America Corp., Series Z 2.0
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Total 23.5%
=======
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% OF TOTAL
SECTOR ALLOCATION INVESTMENTS
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Financials 80.4%
Consumer Staples 7.2
Utilities 5.5
Telecommunication Services 3.9
Materials 2.5
Energy 0.5
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Total 100.0%
=======
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% OF TOTAL
CREDIT QUALITY(1) INVESTMENTS
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A+ 2.9%
A 2.9
A- 5.5
BBB+ 13.9
BBB 9.6
BBB- 22.2
BB+ 13.3
BB 11.4
BB- 8.1
B+ 4.7
B 0.8
NR 4.7
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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 $0.0799 $0.0948 $0.0975 $0.0887
Current Distribution Rate on NAV(3) 5.29% 4.53% 5.34% 5.52% 5.04%
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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 rating is 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 10/31/2015. 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 10/31/2015. 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, 2015 (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 Index(a) from 1/11/2011 through 10/31/2015.
First Trust Preferred BofA Merrill Lynch BofA Merrill Lynch
Securities and Income Fixed Rate Preferred U.S. Capital Securities Blended
Fund - Class I Shares Securities Index ("POP1") Index ("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 13,163 12,992 13,899 13,446
4/30/15 13,693 13,573 14,391 13,987
10/31/15 13,862 13,965 14,123 14,056
(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, 2015
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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 5.05% 0.33% 4.26% 3.26% 5.16% 5.35% 4.79% 4.52% 7.50% 1.60%
Since Inception 6.60% 5.55% 5.84% 5.84% 6.79% 7.04% 6.22% 7.34% 7.20% 7.45%
30-Day SEC Yield(1) 5.30% 4.80% 5.65% 5.80% 5.31% 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 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, these 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, the combined Rule 12b-1 distribution and service fees for
Class R3 Shares 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, 2015
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
ROBERT WOLF - VICE PRESIDENT, PORTFOLIO MANAGER AND SENIOR CREDIT ANALYST
DANIELLE SALTERS, CFA - ASSOCIATE PORTFOLIO MANAGER AND CREDIT ANALYST
ANNUAL REPORT COMMENTARY
MARKET RECAP
The fiscal year ended October 31, 2015 was a period of solid returns and strong
relative performance for the preferred and hybrid markets. Risk assets performed
well throughout the first half of the period due to the low rate environment,
increasing quantitative easing around the globe, and investor demand for yield.
Outperformance of the preferred and hybrid securities markets, in particular,
was driven by the excess spread and yield available and the improved
creditworthiness of financials. During the second half of the period, we saw a
bifurcation between the retail and institutional markets as the $1,000 par
securities market was far more reactionary to macro events, while the $25 par
securities market continued to rally driven by low interest rates and strong
inflows into fund products. The retail market earned 7.50% during the fiscal
year while the institutional market earned 1.60% based on The BofA Merrill Lynch
Fixed Rate Preferred Securities Index ("P0P1") and The BofA Merrill Lynch U.S.
Capital Securities Index ("C0CS"), respectively.
Low interest rates on a global basis continued to support the outperformance of
long-duration fixed-rate securities. This also caused substantial outperformance
of the retail preferred space, which has a higher percentage of fixed-for-life
securities. Additional supporters of the outperformance of retail securities
were the positive technical factors of strong flows into retail exchange-traded
funds ("ETFs") of approximately $3.8 billion, and the lack of retail securities
new issuance. Many of the European and U.S. companies that issued new securities
focused on $1,000 par securities in U.S. dollars ("USD"). Low rates,
particularly in Europe, have caused increased European investor participation in
USD deals, driven by absolute yield differentials and a strengthening U.S.
dollar.
PERFORMANCE ANALYSIS
The First Trust Preferred Securities and Income Fund (the "Fund") Class I shares
produced a total return of 5.35% for the fiscal year ended October 31, 2015
compared to the blended index (a 50/50 blend of P0P1 and C0CS) total return of
4.52%. Throughout the period, the Fund provided comparable income to peer funds
while maintaining an effective duration lower than the blended index.
The main contributors to the Fund's outperformance relative to the blended index
were security selection in variable-rate, fixed-rate, and $1,000 par securities,
as well as its overweight allocation in contingent convertible securities
("CoCos") and non-investment grade securities. Throughout the period, the Fund
utilized fixed-to-float securities as its primary method to manage interest-rate
risk and duration. The Fund's overweight of fixed-to-float securities and
underweight of fixed-for-life securities detracted from relative performance as
long duration securities outperformed shorter duration securities, but this was
more than offset by security selection in these categories. The Fund also
continued to increase its $1,000 par securities weighting during the period in
order to increase its weighting in more defensive structures, such as
fixed-to-floats, and to take advantage of relative value opportunities. As a
result, the underweight of $25 par securities detracted from relative
performance, but the Fund's security selection within $1,000 par securities led
to a positive contribution for the segment. The Fund's weightings in CoCos and
non-investment grade securities, none of which are represented in the blended
index, were also positive contributors to performance.
Page 4
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
ANNUAL REPORT
OCTOBER 31, 2015
MARKET AND FUND OUTLOOK
The preferred and hybrid securities markets continue to benefit from strong
market technicals and improving credit fundamentals. With recent strong economic
data in the U.S., we believe the end of the zero interest rate policy by the
Federal Reserve is inevitable. We expect that short-term rates will rise
modestly in the U.S. while global interest rates remain low, causing the U.S.
Treasury curve to flatten with the 10-year and 30-year parts of the curve to
remain low by historical standards. In this environment, we continue to see
attractive yields on preferred and hybrid securities relative to other parts of
the fixed-income market. Furthermore, issuer credit fundamentals, particularly
in the financials sector, should continue to support the preferred and hybrid
securities markets into 2016. Yield spreads of preferred and hybrid securities
relative to both U.S. Treasuries and other credit spread products remain wider
than historical averages, which we believe should help drive positive
performance in the asset class.
We expect preferred and hybrid securities issuance to be active in 2016 from
both the financials and industrials sectors. Similar to what occurred in 2015,
we anticipate new issuance will be met with strong demand as buyers have mostly
been long-term investors in search of yield and attractive structures, and many
of the new issues offer a component of rate protection. We also expect more new
issuance to be generated by non-U.S. issuers, particularly European banks
issuing CoCos to meet additional tier 1 ("AT1") regulatory capital requirements.
Lack of supply within the U.S. hybrid securities market will likely continue to
provide additional support for the secondary market.
We will continue to actively manage the Fund to protect against the downside
risks in the market while aiming to outperform in all market environments on a
risk-adjusted basis. With the potential for rate volatility, we believe it is
prudent to maintain durations shorter than the blended index, particularly if we
can do so while paying income comparable to the blended index yield. Despite the
impending Federal Reserve rate hike, we believe that a slowly growing U.S.
economy, stable to improving corporate credit, and limited supply continue to be
supportive of the preferred and hybrid securities markets.
Page 5
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
UNDERSTANDING YOUR FUND EXPENSES
OCTOBER 31, 2015 (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, if any, 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, 2015.
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 5/01/2015 - VALUE VALUE 5/01/2015 - EXPENSE
5/1/2015 10/31/2015 10/31/2015 (a) 5/01/2015 10/31/2015 10/31/2015 (a) RATIOS (b)
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Class A $ 1,000.00 $ 1,011.40 $ 7.10 $ 1,000.00 $ 1,018.15 $ 7.12 1.40%
Class C 1,000.00 1,007.60 10.88 1,000.00 1,014.37 10.92 2.15
Class F 1,000.00 1,012.30 6.59 1,000.00 1,018.65 6.61 1.30
Class I 1,000.00 1,012.60 5.83 1,000.00 1,019.41 5.85 1.15
Class R3 1,000.00 1,010.10 8.36 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, 2015 through October 31,
2015, multiplied by 184/365 (to reflect the six-month period).
(b) These expense ratios reflect expense caps.
Page 6
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2015
STATED STATED
SHARES DESCRIPTION RATE MATURITY VALUE
------------- ----------------------------------------------- ---------- ------------- --------------
$25 PAR PREFERRED SECURITIES - 24.2%
BANKS - 8.9%
20,450 Barclays Bank PLC, Series 3.................... 7.10% (a) $ 530,473
59,895 Citigroup Capital XIII (b)..................... 6.69% 10/30/40 1,521,333
55,000 Citigroup, Inc., Series K (b).................. 6.88% (a) 1,514,700
2,577 City National Corp., Series D (b).............. 6.75% (a) 74,862
35,100 First Niagara Financial Group., Inc.,
Series B (b)................................ 8.63% (a) 966,654
120,000 GMAC Capital Trust I, Series 2 (b)............. 8.13% 02/15/40 3,099,600
29,385 JPMorgan Chase & Co., Series BB................ 6.15% (a) 740,796
87,630 PNC Financial Services Group, Inc.,
Series P (b)................................ 6.13% (a) 2,440,495
3,800 Royal Bank of Scotland Group PLC, Series R..... 6.13% (a) 94,962
46,445 Royal Bank of Scotland Group PLC, Series S..... 6.60% (a) 1,179,239
20,000 Wells Fargo & Co., Series J.................... 8.00% (a) 561,000
53,574 Wintrust Financial Corp., Series D (b)......... 6.50% (a) 1,382,745
17,293 Zions Bancorporation, Series F................. 7.90% (a) 459,129
--------------
14,565,988
--------------
CAPITAL MARKETS - 3.2%
38,581 BGC Partners, Inc.............................. 8.13% 06/15/42 1,048,246
70,000 Deutsche Bank Contingent Capital Trust III..... 7.60% (a) 1,871,800
85,000 Deutsche Bank Contingent Capital Trust V....... 8.05% (a) 2,323,900
--------------
5,243,946
--------------
CONSUMER FINANCE - 0.4%
25,000 Ally Financial, Inc., Series A (b)............. 8.50% (a) 642,500
--------------
DIVERSIFIED FINANCIAL SERVICES - 1.0%
16,800 RBS Capital Funding Trust V, Series E.......... 5.90% (a) 414,120
40,000 RBS Capital Funding Trust VI, Series F......... 6.25% (a) 1,009,200
11,200 RBS Capital Funding Trust VII, Series G........ 6.08% (a) 278,880
--------------
1,702,200
--------------
ELECTRIC UTILITIES - 0.4%
25,000 Southern (The) Co.............................. 6.25% 10/15/75 659,000
--------------
FOOD PRODUCTS - 2.8%
49,381 CHS, Inc., Series 1............................ 7.88% (a) 1,418,222
115,000 CHS, Inc., Series 2 (b)........................ 7.10% (a) 3,183,200
--------------
4,601,422
--------------
INSURANCE - 3.6%
40,000 Aspen Insurance Holdings Ltd. (b).............. 5.95% (a) 1,019,600
84,475 Endurance Specialty Holdings Ltd., Series B.... 7.50% (a) 2,200,574
500 PartnerRe Ltd., Series D....................... 6.50% (a) 13,550
90,000 PartnerRe Ltd., Series E....................... 7.25% (a) 2,572,200
--------------
5,805,924
--------------
OIL, GAS & CONSUMABLE FUELS - 0.5%
30,000 NuStar Logistics, L.P. (b)..................... 7.63% 01/15/43 768,600
--------------
REAL ESTATE INVESTMENT TRUSTS - 3.4%
24,015 American Homes 4 Rent, Series B (c)............ 5.00% (a) 600,375
27,274 DuPont Fabros Technology, Inc., Series A....... 7.88% (a) 687,032
41,400 EPR Properties, Series F....................... 6.63% (a) 1,050,732
74,356 Equity Commonwealth, Series E.................. 7.25% (a) 1,902,770
52,600 VEREIT, Inc., Series F......................... 6.70% (a) 1,305,006
--------------
5,545,915
--------------
See Notes to Financial Statements Page 7
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
STATED STATED
SHARES DESCRIPTION RATE MATURITY VALUE
------------- ----------------------------------------------- ---------- ------------- --------------
$25 PAR PREFERRED SECURITIES (CONTINUED)
TOTAL $25 PAR PREFERRED SECURITIES.......................................... $ 39,535,495
(Cost $39,018,863) --------------
$100 PAR PREFERRED SECURITIES - 3.3%
BANKS - 3.3%
21,600 CoBank ACB, Series G........................... 6.13% (a) 1,970,326
32,500 CoBank ACB, Series F (b) (d)................... 6.25% (a) 3,377,969
--------------
TOTAL $100 PAR PREFERRED SECURITIES......................................... 5,348,295
--------------
(Cost $5,384,175)
$1,000 PAR PREFERRED SECURITIES - 5.8%
BANKS - 2.9%
500 AgStar Financial Services ACA (b) (e).......... 6.75% (a) 531,531
3,309 Farm Credit Bank of Texas, Series 1 (e)........ 10.00% (a) 4,177,613
--------------
4,709,144
--------------
DIVERSIFIED FINANCIAL SERVICES - 0.2%
300 Pitney Bowes International Holdings, Inc.,
Series F (e)................................ 6.13% (a) 318,281
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 1.9%
2,500 Centaur Funding Corp. (e)...................... 9.08% 04/21/20 3,100,000
--------------
INSURANCE - 0.2%
490 XLIT Ltd., Series D (f)........................ 3.44% (a) 405,475
--------------
REAL ESTATE INVESTMENT TRUSTS - 0.6%
750 Sovereign Real Estate Investment Trust (e)..... 12.00% (a) 955,312
--------------
TOTAL $1,000 PAR PREFERRED SECURITIES......................................... 9,488,212
--------------
(Cost $9,520,953)
PAR STATED STATED
AMOUNT DESCRIPTION RATE MATURITY VALUE
------------- ----------------------------------------------- ---------- ------------- --------------
CAPITAL PREFERRED SECURITIES - 63.5%
BANKS - 24.5%
$ 2,400,000 Banco Bilbao Vizcaya Argentaria S.A. (b)....... 9.00% (a) 2,593,560
1,000,000 Banco do Brasil S.A. (b)....................... 8.50% (a) 907,050
1,000,000 Banco do Brasil S.A. (b)....................... 9.25% (a) 713,750
3,000,000 Bank of America Corp., Series Z (b)............ 6.50% (a) 3,138,780
2,000,000 Barclays PLC (b)............................... 8.25% (a) 2,134,410
2,750,000 Citizens Financial Group, Inc. (b) (d)......... 5.50% (a) 2,708,750
1,000,000 Commerzbank AG................................. 8.13% 09/19/23 1,161,670
1,000,000 Countrywide Capital III, Series B.............. 8.05% 06/15/27 1,251,282
1,000,000 Credit Agricole S.A. (b)....................... 8.38% (a) 1,137,600
2,000,000 Dresdner Funding Trust I....................... 8.15% 06/30/31 2,476,752
2,500,000 Fuerstenberg Capital International Sarl &
Cie SECS (b)................................ 10.25% (a) 2,593,017
750,000 JPMorgan Chase & Co., Series S (b)............. 6.75% (a) 814,688
500,000 KeyCorp Capital II (g)......................... 6.88% 03/17/29 574,552
500,000 LBG Capital No.1 PLC (b)....................... 8.50% (a) 584,235
2,275,000 Lloyds Bank PLC (b) (d)........................ 12.00% (a) 3,287,375
Page 8 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
PAR STATED STATED
AMOUNT DESCRIPTION RATE MATURITY VALUE
------------- ----------------------------------------------- ---------- ------------- --------------
CAPITAL PREFERRED SECURITIES (CONTINUED)
BANKS (CONTINUED)
$ 1,298,000 Natixis S.A. (b)............................... 10.00% (a) $ 1,495,945
2,145,000 NIBC Bank N.V.................................. 7.63% (a) 2,166,763
1,000,000 Royal Bank of Scotland Group PLC (b)........... 7.50% (a) 1,037,500
2,000,000 Royal Bank of Scotland Group PLC (b)........... 8.00% (a) 2,095,000
3,000,000 Societe Generale SA (b) (d).................... 8.00% (a) 3,036,099
1,000,000 Wells Fargo & Co., Series U (b)................ 5.88% (a) 1,058,950
2,741,000 Zions Bancorporation, Series J (b)............. 7.20% (a) 2,960,280
--------------
39,928,008
--------------
CAPITAL MARKETS - 1.9%
1,041,000 Deutsche Bank Capital Trust IV (b) (g)......... 4.59% (a) 1,035,514
1,500,000 Goldman Sachs Capital III (f).................. 4.00% (a) 1,080,000
1,000,000 UBS Group AG (b)............................... 7.13% (a) 1,045,020
--------------
3,160,534
--------------
DIVERSIFIED FINANCIAL SERVICES - 5.9%
3,000,000 General Electric Capital Corp., Series A (b)... 7.13% (a) 3,528,750
1,000,000 General Electric Capital Corp., Series B (b)... 6.25% (a) 1,114,600
2,250,000 Glen Meadow Pass Through Trust (b) (d)......... 6.51% 02/12/67 1,951,875
3,030,000 Macquarie PMI LLC.............................. 8.38% (a) 3,044,620
--------------
9,639,845
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 2.0%
2,370,000 Colombia Telecomunicaciones S.A. ESP (b)....... 8.50% (a) 2,130,037
1,000,000 Koninklijke KPN NV (b)......................... 7.00% 03/28/73 1,035,370
--------------
3,165,407
--------------
ELECTRIC UTILITIES - 4.3%
2,500,000 Enel SpA (b) (d)............................... 8.75% 09/24/73 2,887,500
2,232,000 PPL Capital Funding, Inc., Series A (b)........ 6.70% 03/30/67 1,886,625
2,000,000 Southern California Edison Co., Series E (b)... 6.25% (a) 2,225,000
--------------
6,999,125
--------------
FOOD PRODUCTS - 2.4%
3,620,000 Land O'Lakes Capital Trust I (d)............... 7.45% 03/15/28 3,855,300
--------------
INDEPENDENT POWER AND RENEWABLE ELECTRICITY PRODUCERS - 0.7%
1,075,000 AES Gener S.A. (b)............................. 8.38% 12/18/73 1,118,000
--------------
INSURANCE - 19.3%
1,000,000 AG Insurance S.A. N.V. (b)..................... 6.75% (a) 1,081,375
4,200,000 Aquarius + Investments PLC for Swiss
Reinsurance Co., Ltd. (b)................... 8.25% (a) 4,585,535
2,215,000 Assured Guaranty Municipal Holdings,
Inc. (b) (d)................................ 6.40% 12/15/66 1,616,950
2,000,000 Aviva PLC...................................... 8.25% (a) 2,191,160
1,000,000 Catlin Insurance Co., Ltd. (b) (d)............. 7.25% (a) 860,000
1,000,000 CNP Assurances (b)............................. 6.88% (a) 1,075,690
2,500,000 CNP Assurances (b)............................. 7.50% (a) 2,744,210
3,300,000 Friends Life Holdings PLC (b).................. 7.88% (a) 3,692,060
980,000 Hartford Financial Services Group, Inc. (b).... 8.13% 06/15/38 1,090,740
1,680,000 La Mondiale SAM (b)............................ 7.63% (a) 1,827,000
3,285,000 Liberty Mutual Group, Inc. (b)................. 10.75% 06/15/58 4,935,712
500,000 Meiji Yasuda Life Insurance Co. (b) (d)........ 5.20% 10/20/45 516,978
1,587,000 MetLife Capital Trust X (b) (d)................ 9.25% 04/08/38 2,210,215
1,250,000 MetLife, Inc. (b).............................. 10.75% 08/01/39 1,971,875
500,000 MMI Capital Trust I, Series B.................. 7.63% 12/15/27 567,055
See Notes to Financial Statements Page 9
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
PAR STATED STATED
AMOUNT DESCRIPTION RATE MATURITY VALUE
------------- ----------------------------------------------- ---------- ------------- --------------
CAPITAL PREFERRED SECURITIES (CONTINUED)
INSURANCE (CONTINUED)
$ 500,000 Sirius International Group Ltd. (b) (e)........ 7.51% (a) $ 506,250
--------------
31,472,805
--------------
METALS & MINING - 2.5%
2,000,000 BHP Billiton Finance USA Ltd. (b) (d).......... 6.25% 10/19/75 2,047,500
2,000,000 BHP Billiton Finance USA Ltd. (b) (d).......... 6.75% 10/19/75 2,042,500
--------------
4,090,000
--------------
TOTAL CAPITAL PREFERRED SECURITIES.......................................... 103,429,024
--------------
(Cost $104,629,148)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ----------------------------------------------- ---------- ------------- --------------
CORPORATE BONDS AND NOTES - 1.9%
INSURANCE - 1.9%
3,000,000 Land O'Lakes, Inc. (e)......................... 8.00% (a) 3,101,250
--------------
(Cost $3,000,000)
TOTAL INVESTMENTS - 98.7%................................................... 160,902,276
(Cost $161,553,139) (h)
NET OTHER ASSETS AND LIABILITIES - 1.3%..................................... 2,046,094
--------------
NET ASSETS - 100.0%......................................................... $ 162,948,370
==============
(a) Perpetual maturity.
(b) Fixed-to-floating or fixed-to-variable rate security. The interest rate
shown reflects the fixed rate in effect at October 31, 2015. At a
predetermined date, the fixed rate will change to a floating rate or a
variable rate.
(c) Step-up security. A security where the coupon increases or steps up at a
predetermined date. Interest rate shown reflects the rate in effect at
October 31, 2015.
(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 judgement. At October 31, 2015, securities noted as
such amounted to $30,399,011 or 18.66% of net assets.
(e) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the 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).
(f) Floating rate security. The interest rate shown reflects the rate in
effect at October 31, 2015.
(g) Pursuant to procedures adopted by the Trust's Board of Trustees, this
security has been determined to be illiquid by the Sub-Advisor.
(h) Aggregate cost for federal income tax purposes is $161,789,269. As of
October 31, 2015, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$2,008,959 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$2,895,952.
Page 10 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of October 31,
2015 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 10/31/2015 PRICES INPUTS INPUTS
--------------------------------------------------- ------------- ------------- ------------- -------------
$25 Par Preferred Securities*...................... $ 39,535,495 $ 39,535,495 $ -- $ --
$100 Par Preferred Securities*..................... 5,348,295 -- 5,348,295 --
$1,000 Par Preferred Securities*................... 9,488,212 -- 9,488,212 --
Capital Preferred Securities*...................... 103,429,024 -- 103,429,024 --
Corporate Bonds and Notes*......................... 3,101,250 -- 3,101,250 --
------------- ------------- ------------- -------------
Total Investments.................................. $ 160,902,276 $ 39,535,495 $ 121,366,781 $ --
============= ============= ============= =============
* 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. There were no
transfers between Levels at October 31, 2015.
See Notes to Financial Statements Page 11
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2015
ASSETS:
Investments, at value
(Cost $161,553,139)............................................................................. $160,902,276
Cash............................................................................................ 2,577,119
Receivables:
Interest........................................................................................ 1,617,758
Fund shares sold................................................................................ 832,602
Investment securities sold...................................................................... 579,769
Dividends....................................................................................... 149,260
Prepaid expenses................................................................................... 50,401
Other assets....................................................................................... 8,437
------------
Total Assets.................................................................................... 166,717,622
------------
LIABILITIES:
Payables:
Investment securities purchased................................................................. 3,013,915
Fund shares repurchased......................................................................... 348,469
Investment advisory fees........................................................................ 143,149
Distributions payable........................................................................... 79,236
12b-1 distribution and service fees............................................................. 44,508
Administrative fees............................................................................. 34,856
Audit and tax fees.............................................................................. 33,200
Printing fees................................................................................... 24,940
Transfer agent fees............................................................................. 21,061
Custodian fees.................................................................................. 16,427
Registration fees............................................................................... 2,848
Commitment fees................................................................................. 1,506
Trustees' fees and expenses..................................................................... 1,490
Financial reporting fees........................................................................ 771
Other liabilities.................................................................................. 2,876
------------
Total Liabilities............................................................................... 3,769,252
------------
NET ASSETS......................................................................................... $162,948,370
============
NET ASSETS CONSIST OF:
Paid-in capital.................................................................................... $174,014,791
Par value ($0.01 per share with an unlimited number of shares authorized).......................... 76,919
Accumulated net investment income (loss)........................................................... 146,400
Accumulated net realized gain (loss) on investments................................................ (10,638,877)
Net unrealized appreciation (depreciation) on investments.......................................... (650,863)
------------
NET ASSETS......................................................................................... $162,948,370
============
MAXIMUM OFFERING PRICE PER SHARE:
CLASS A SHARES:
Net asset value and redemption price per share (Based on net assets of $28,585,278 and
1,352,726 shares of beneficial interest issued and outstanding)............................... $ 21.13
Maximum sales charge (4.50% of offering price).................................................. 1.00
------------
Maximum offering price to public................................................................ $ 22.13
============
CLASS C SHARES:
Net asset value and redemption price per share (Based on net assets of $45,093,466 and
2,129,968 shares of beneficial interest issued and outstanding)............................... $ 21.17
============
CLASS F SHARES:
Net asset value and redemption price per share (Based on net assets of $2,500,783 and 117,364
shares of beneficial interest issued and outstanding)......................................... $ 21.31
============
CLASS I SHARES:
Net asset value and redemption price per share (Based on net assets of $86,411,536 and
4,074,951 shares of beneficial interest issued and outstanding)............................... $ 21.21
============
CLASS R3 SHARES:
Net asset value and redemption price per share (Based on net assets of $357,307 and 16,911
shares of beneficial interest issued and outstanding)......................................... $ 21.13
============
Page 12 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2015
INVESTMENT INCOME:
Interest........................................................................................... $ 6,846,904
Dividends.......................................................................................... 4,103,183
Other.............................................................................................. 126,400
------------
Total investment income......................................................................... 11,076,487
------------
EXPENSES:
Investment advisory fees........................................................................... 1,274,510
12b-1 distribution and/or service fees:
Class A......................................................................................... 80,257
Class C......................................................................................... 447,992
Class F......................................................................................... 4,303
Class R3........................................................................................ 1,916
Transfer agent fees................................................................................ 181,903
Registration fees.................................................................................. 90,214
Administrative fees................................................................................ 67,125
Expenses previously waived or reimbursed........................................................... 60,975
Legal fees......................................................................................... 58,831
Printing fees...................................................................................... 36,708
Audit and tax fees................................................................................. 34,788
Custodian fees..................................................................................... 33,065
Commitment fees.................................................................................... 19,855
Trustees' fees and expenses........................................................................ 17,892
Financial reporting fees........................................................................... 9,250
Excise tax......................................................................................... 8,636
Listing expense.................................................................................... 2,500
Other.............................................................................................. 12,401
------------
Total expenses.................................................................................. 2,443,121
Fees waived or expenses reimbursed by the investment advisor.................................... (67,919)
------------
Net expenses....................................................................................... 2,375,202
------------
NET INVESTMENT INCOME (LOSS)....................................................................... 8,701,285
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments............................................................ 372,486
Net change in unrealized appreciation (depreciation) on investments................................ (1,448,520)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)............................................................ (1,076,034)
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.................................... $ 7,625,251
============
See Notes to Financial Statements Page 13
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
10/31/2015 10/31/2014
------------- -------------
OPERATIONS:
Net investment income (loss)...................................................... $ 8,701,285 $ 9,028,924
Net realized gain (loss).......................................................... 372,486 (4,146,443)
Net change in unrealized appreciation (depreciation).............................. (1,448,520) 11,391,933
------------- -------------
Net increase (decrease) in net assets resulting from operations................... 7,625,251 16,274,414
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A Shares.................................................................... (1,690,247) (3,416,968)
Class C Shares.................................................................... (2,016,097) (2,190,987)
Class F Shares.................................................................... (152,397) (191,443)
Class I Shares.................................................................... (4,338,486) (2,812,589)
Class R3 Shares................................................................... (19,214) (23,181)
------------- -------------
(8,216,441) (8,635,168)
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM RETURN OF CAPITAL:
Class A Shares.................................................................... -- (82,755)
Class C Shares.................................................................... -- (53,063)
Class F Shares.................................................................... -- (4,636)
Class I Shares.................................................................... -- (68,117)
Class R3 Shares................................................................... -- (562)
------------- -------------
-- (209,133)
------------- -------------
Total distributions to shareholders............................................... (8,216,441) (8,844,301)
------------- -------------
CAPITAL TRANSACTIONS:
Proceeds from shares sold......................................................... 56,294,234 59,865,570
Proceeds from shares reinvested................................................... 7,209,207 7,470,411
Cost of shares redeemed........................................................... (52,197,485) (131,107,450)
------------- -------------
Net increase (decrease) in net assets resulting from capital transactions......... 11,305,956 (63,771,469)
------------- -------------
Total increase (decrease) in net assets........................................... 10,714,766 (56,341,356)
NET ASSETS:
Beginning of period............................................................... 152,233,604 208,574,960
------------- -------------
End of period..................................................................... $ 162,948,370 $ 152,233,604
============= =============
Accumulated net investment income (loss) at end of period......................... $ 146,400 $ 36,688
============= =============
Page 14 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
FOR THE PERIOD
YEAR ENDED OCTOBER 31, 2/25/2011 (a)
----------------------------------------------------------------- THROUGH
CLASS A SHARES 2015 2014 2013 2012 10/31/2011
-------------- -------------- -------------- -------------- --------------
Net asset value, beginning of period........ $ 21.20 $ 20.27 $ 22.42 $ 20.10 $ 20.26
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................ 1.18 (b) 1.14 (b) 0.98 (b) 0.89 (b) 0.79
Net realized and unrealized gain (loss)..... (0.13) 0.91 (1.91) 2.55 (0.11)
---------- ---------- ---------- ---------- ----------
Total from investment operations............ 1.05 2.05 (0.93) 3.44 0.68
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income....................... (1.12) (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) (1.12) (1.22) (1.12) (0.84)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period.............. $ 21.13 $ 21.20 $ 20.27 $ 22.42 $ 20.10
========== ========== ========== ========== ==========
TOTAL RETURN (d)............................ 5.05% 10.35% (4.36)% 17.60% 3.45%
========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........ $ 28,585 $ 32,874 $ 90,286 $ 83,717 $ 6,932
Ratio of total expenses to average net
assets................................... 1.50% (e) 1.40% 1.44% 1.83% 6.68% (f)
Ratio of net expenses to average net
assets................................... 1.41% (e) 1.40% 1.40% 1.40% 1.40% (f)
Ratio of net investment income (loss) to
average net assets....................... 5.55% 5.47% 4.52% 4.13% 4.68% (f)
Portfolio turnover rate..................... 123% 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) Ratio reflects excise tax of 0.01% which is not included in the expense
cap.
(f) Annualized.
See Notes to Financial Statements Page 15
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
FOR THE PERIOD
YEAR ENDED OCTOBER 31, 2/25/2011 (a)
----------------------------------------------------------------- THROUGH
CLASS C SHARES 2015 2014 2013 2012 10/31/2011
-------------- -------------- -------------- -------------- --------------
Net asset value, beginning of period........ $ 21.24 $ 20.30 $ 22.45 $ 20.13 $ 20.26
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................ 1.02 (b) 0.99 (b) 0.83 (b) 0.73 (b) 0.69
Net realized and unrealized gain (loss)..... (0.13) 0.91 (1.93) 2.55 (0.08)
---------- ---------- ---------- ---------- ----------
Total from investment operations............ 0.89 1.90 (1.10) 3.28 0.61
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income....................... (0.96) (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) (0.96) (1.05) (0.96) (0.74)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period.............. $ 21.17 $ 21.24 $ 20.30 $ 22.45 $ 20.13
========== ========== ========== ========== ==========
TOTAL RETURN (d)............................ 4.26% 9.56% (5.03)% 16.70% 3.08%
========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........ $ 45,093 $ 45,248 $ 55,376 $ 36,681 $ 2,720
Ratio of total expenses to average net
assets................................... 2.16% (e) 2.18% 2.17% 2.66% 8.03% (f)
Ratio of net expenses to average net
assets................................... 2.16% (e) 2.15% 2.15% 2.15% 2.15% (f)
Ratio of net investment income (loss) to
average net assets....................... 4.79% 4.75% 3.81% 3.36% 4.10% (f)
Portfolio turnover rate..................... 123% 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) Ratio reflects excise tax of 0.01% which is not included in the expense
cap.
(f) 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
FOR THE PERIOD
YEAR ENDED OCTOBER 31, 3/2/2011 (a)
----------------------------------------------------------------- THROUGH
CLASS F SHARES 2015 2014 2013 2012 10/31/2011
-------------- -------------- -------------- -------------- --------------
Net asset value, beginning of period........ $ 21.37 $ 20.42 $ 22.59 $ 20.12 $ 20.25
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................ 1.23 (b) 1.18 (b) 1.02 (b) 0.89 (b) 0.70
Net realized and unrealized gain (loss)..... (0.15) 0.91 (1.95) 2.72 (0.07)
---------- ---------- ---------- ---------- ----------
Total from investment operations............ 1.08 2.09 (0.93) 3.61 0.63
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income....................... (1.14) (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) (1.14) (1.24) (1.14) (0.76)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period.............. $ 21.31 $ 21.37 $ 20.42 $ 22.59 $ 20.12
========== ========== ========== ========== ==========
TOTAL RETURN (d)............................ 5.16% 10.48% (4.32)% 18.47% 3.17%
========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........ $ 2,501 $ 2,617 $ 3,735 $ 4,012 $ 1
Ratio of total expenses to average net
assets................................... 1.92% 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% 1.30% (e)
Ratio of net investment income (loss) to
average net assets....................... 5.70% 5.64% 4.63% 4.09% 5.21% (e)
Portfolio turnover rate..................... 123% 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.
See Notes to Financial Statements Page 17
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
FOR THE PERIOD
YEAR ENDED OCTOBER 31, 1/11/2011 (a)
----------------------------------------------------------------- THROUGH
CLASS I SHARES 2015 2014 2013 2012 10/31/2011
-------------- -------------- -------------- -------------- --------------
Net asset value, beginning of period........ $ 21.27 $ 20.33 $ 22.47 $ 20.15 $ 20.00
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................ 1.23 (b) 1.20 (b) 1.04 (b) 0.92 (b) 0.82
Net realized and unrealized gain (loss)..... (0.12) 0.91 (1.91) 2.57 0.21
---------- ---------- ---------- ---------- ----------
Total from investment operations............ 1.11 2.11 (0.87) 3.49 1.03
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income....................... (1.17) (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) (1.17) (1.27) (1.17) (0.88)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period.............. $ 21.21 $ 21.27 $ 20.33 $ 22.47 $ 20.15
========== ========== ========== ========== ==========
TOTAL RETURN (d)............................ 5.35% 10.65% (4.06)% 17.84% 5.21%
========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........ $ 86,412 $ 71,094 $ 58,700 $ 45,432 $ 439
Ratio of total expenses to average net
assets................................... 1.16% (e) 1.15% 1.23% 1.46% 22.09% (f)
Ratio of net expenses to average net
assets................................... 1.16% (e) 1.15% 1.15% 1.15% 1.15% (f)
Ratio of net investment income (loss) to
average net assets....................... 5.80% 5.74% 4.79% 4.20% 5.12% (f)
Portfolio turnover rate..................... 123% 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) Ratio reflects excise tax of 0.01% which is not included in the expense
cap.
(f) 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
FOR THE PERIOD
YEAR ENDED OCTOBER 31, 3/2/2011 (a)
----------------------------------------------------------------- THROUGH
CLASS R3 SHARES 2015 2014 2013 2012 10/31/2011
-------------- -------------- -------------- -------------- --------------
Net asset value, beginning of period........ $ 21.20 $ 20.26 $ 22.41 $ 20.11 $ 20.25
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................ 1.13 (b) 1.09 (b) 0.93 (b) 0.80 (b) 0.61
Net realized and unrealized gain (loss)..... (0.14) 0.92 (1.92) 2.56 (0.07)
---------- ---------- ---------- ---------- ----------
Total from investment operations............ 0.99 2.01 (0.99) 3.36 0.54
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income....................... (1.06) (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......................... (1.06) (1.07) (1.16) (1.06) (0.68)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period.............. $ 21.13 $ 21.20 $ 20.26 $ 22.41 $ 20.11
========== ========== ========== ========== ==========
TOTAL RETURN (d)............................ 4.79% 10.14% (4.61)% 17.19% 2.74%
========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........ $ 357 $ 401 $ 478 $ 615 $ 1
Ratio of total expenses to average net
assets................................... 6.56% (e) 5.74% 4.87% 11.51% 301.79% (f)
Ratio of net expenses to average net
assets................................... 1.66% (e) 1.65% 1.65% 1.65% 1.90% (f)
Ratio of net investment income (loss) to
average net assets....................... 5.30% 5.25% 4.25% 3.66% 4.62% (f)
Portfolio turnover rate..................... 123% 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) Ratio reflects excise tax of 0.01% which is not included in the expense
cap.
(f) Annualized.
See Notes to Financial Statements Page 19
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2015
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 Fund, which is an investment company within the scope of Financial
Accounting Standards Board ("FASB") Accounting Standards Update 2013-08, follows
accounting and reporting guidance under FASB Accounting Standards Codification
Topic 946, "Financial Services-Investment Companies." The following is a summary
of significant accounting policies consistently followed by the Fund in the
preparation of its financial statements. The preparation of financial statements
in accordance with accounting principles generally accepted in the United States
of America ("U.S. GAAP") requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The net asset value ("NAV") 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 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 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.
Page 20
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2015
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.
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 (the "1933 Act")) for which a pricing service is unable to
provide a market price; securities whose trading has been formally suspended; a
security whose market or fair value price is not available from a
pre-established pricing source; a security with respect to which an event has
occurred that is likely to materially affect the value of the security after the
market has closed but before the calculation of the Fund's NAV or make it
difficult or impossible to obtain a reliable market quotation; and a security
whose price, as provided by the pricing service, does not reflect the security's
fair value. As a general principle, the current fair value of a security would
appear to be the amount which the owner might reasonably expect to receive for
the security upon its current sale. When fair value prices are used, generally
they will differ from market quotations or official closing prices on the
applicable exchanges. A variety of factors may be considered in determining the
fair value of such securities, including, but not limited to, the following:
1) the 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.
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.
Page 21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2015
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of October 31, 2015, 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, 2015, 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 PAR CURRENT CARRYING % OF
SECURITY DATE AMOUNT PRICE COST VALUE NET ASSETS
---------------------------------------------------------------------------------------------------------------------------
AgStar Financial Services ACA, 6.75% 7/31/15 500 $ 1,063.063 $ 526,250 $ 531,531 0.33%
Centaur Funding Corp., 9.08%, 4/21/20 7/17/14-1/9/15 2,500 1,240.000 3,128,350 3,100,000 1.90
Farm Credit Bank of Texas,
Series 1, 10.00% 3/24/14-4/27/15 3,309 1,262.500 4,130,703 4,177,613 2.56
Land O'Lakes, Inc., 8.00% 7/9/15 $3,000,000 1.034 3,000,000 3,101,250 1.90
Pitney Bowes International Holdings,
Inc., Series F, 6.13% 4/7/15 300 1,060.938 315,375 318,281 0.20
Sirius International Group Ltd, 7.51% 5/19/15 $ 500,000 1.013 525,000 506,250 0.31
Sovereign Real Estate
Investment Trust, 12.00% 2/5/15 750 1,273.75 1,005,000 955,312 0.59
--------------------------------------
$12,630,678 $12,690,237 7.79%
--------------------------------------
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.
Page 22
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2015
Permanent differences incurred during the year ended October 31, 2015, resulting
in book and tax accounting differences, have been reclassified at year end to
reflect a decrease in accumulated net investment income (loss) of $375,132, an
increase in accumulated net realized gain (loss) on investments of $368,165 and
an increase to paid-in capital of $6,967. Net assets were not affected by these
reclassifications.
The tax character of distributions paid during the fiscal years ended October
31, 2015 and 2014 was as follows:
Distributions paid from: 2015 2014
Ordinary income............................ $ 8,216,441 $ 8,635,168
Capital gain............................... -- --
Return of capital.......................... -- 209,133
As of October 31, 2015, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income.............. $ 308,049
Undistributed capital gains................ --
------------
Total undistributed earnings............... 308,049
Accumulated capital and other losses....... (10,564,396)
Net unrealized appreciation (depreciation). (886,993)
------------
Total accumulated earnings (losses)........ (11,143,340)
Other...................................... --
Paid-in capital............................ 174,091,710
------------
Net assets................................. $162,948,370
============
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 and state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
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, 2015, for
federal income tax purposes, the Fund had a capital loss carryforward of
$10,564,396 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 2012, 2013,
2014 and 2015 remain open to federal and state audit. As of October 31, 2015,
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.
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 supervising the selection and 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.
Page 23
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2015
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, 2017 and then will not
exceed 1.50% from March 1, 2017 to February 28, 2026 (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
time the expense was borne or the fee was waived by First Trust and Stonebridge.
Class C 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, 2015 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 2013 2014 2015 TOTAL
------------ ------------ ------------ ------------ ------------ ------------
$ 67,919 $ -- $ 134,127 $ 50,893 $ 67,919 $ 252,939
During the year ended October 31, 2015, First Trust recovered $60,975 of fees
that were previously waived.
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, 2015 OCTOBER 31, 2014
SHARES VALUE SHARES VALUE
---------- ------------- ---------- -------------
Sales:
Class A 465,300 $ 9,878,142 377,644 $ 7,798,542
Class C 281,791 5,999,358 167,887 3,518,855
Class F 146,344 3,141,137 38,025 792,945
Class I 1,750,444 37,275,597 2,252,138 47,755,228
Class R3 -- -- -- --
---------- ------------- ---------- -------------
Total Sales: 2,643,879 $ 56,294,234 2,835,694 $ 59,865,570
========== ============= ========== =============
Page 24
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2015
YEAR ENDED YEAR ENDED
OCTOBER 31, 2015 OCTOBER 31, 2014
SHARES VALUE SHARES VALUE
---------- ------------- ---------- -------------
Dividend Reinvestment:
Class A 52,174 $ 1,108,173 131,229 $ 2,727,650
Class C 82,508 1,754,763 92,688 1,935,807
Class F 4,515 96,604 6,467 136,053
Class I 199,494 4,249,667 127,423 2,670,901
Class R3 -- -- -- --
---------- ------------- ---------- -------------
Total Dividend Reinvestment: 338,691 $ 7,209,207 357,807 $ 7,470,411
========== ============= ========== =============
Redemptions:
Class A (715,203) $ (15,165,198) (3,413,022) $ (71,154,976)
Class C (364,533) (7,754,300) (857,812) (17,752,129)
Class F (155,982) (3,333,308) (104,919) (2,212,870)
Class I (1,216,841) (25,901,934) (1,925,291) (39,889,665)
Class R3 (2,012) (42,745) (4,679) (97,810)
---------- ------------- ---------- -------------
Total Redemptions: (2,454,571) $ (52,197,485) (6,305,723) $(131,107,450)
========== ============= ========== =============
5. 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, 2015, were $205,943,222 and
$193,444,464, respectively.
6. BORROWINGS
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 The Bank of Nova Scotia ("Scotia") as administrative agent for a group of
lenders to be a liquidity backstop during periods of high redemption volume.
Prior to March 26, 2015, 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. Effective March 26, 2015, the commitment fee was
changed to 0.15%. First Trust allocates the commitment fee 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, 2015.
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%, 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.
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.
Page 25
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2015
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 was
the following subsequent event:
At a meeting on December 7, 2015, the Board accepted Mr. Bradley's resignation
from his position as the President and Chief Executive Officer of the Fund,
effective December 31, 2015. At the same meeting, the Board elected Mr. Dykas to
serve as the President and Chief Executive Officer and Mr. Donald Swade,
formerly an Assistant Treasurer of the Fund, to serve as the Treasurer, Chief
Financial Officer and Chief Accounting Officer of the Fund.
Management anticipates that sometime before the end of December 2015, First
Trust Portfolios L.P., First Trust's affiliate, will transfer its ownership
interest in Stonebridge to First Trust Capital Partners LLC, an affiliate of
both First Trust and First Trust Portfolios L.P. Like First Trust, First Trust
Portfolios L.P. and First Trust Capital Partners LLC are owned by The Charger
Corporation and Grace Partners of DuPage L.P. The anticipated transfer will not
amount to a change of control of Stonebridge or an assignment of the
sub-advisory agreement between the Fund and Stonebridge, and will otherwise have
no effect on the Fund.
Page 26
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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:
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,
2015, 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 audit 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, 2015 by correspondence with the Fund's
custodian and brokers; when replies were not received from brokers, 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, 2015, 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 22, 2015
Page 27
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2015 (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 Form N-Qs
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
TAX INFORMATION
The Fund hereby designates as qualified dividend income 64.15% of its ordinary
income distributions (including short-term capital gains, if applicable) for the
period ended October 31, 2015. 32.87% of the ordinary income (including
short-term capital gain, if applicable) distributions made by the Fund during
the period ended October 31, 2015, 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 28
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2015 (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 16, 2015. The Board determined that the continuation of the Agreements
is in the best interests of the Fund in light of the extent and quality of the
services provided and such other matters as the Board considered to be relevant
in the exercise of its reasonable business judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. At meetings held on April 20, 2015 and June 16, 2015, the
Board, including the Independent Trustees, reviewed materials provided by the
Advisor and the Sub-Advisor responding to requests for information from counsel
to the Independent Trustees that, among other things, outlined the services
provided by the Advisor and the Sub-Advisor (including the relevant personnel
responsible for these services and their experience); the advisory and
sub-advisory 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 to a peer group
of funds selected by Management Practice, Inc. ("MPI"), an independent source
(the "MPI Peer Group"); expenses of the Fund as compared to expense ratios of
the funds in the MPI Peer Group; performance information for the Fund; the
nature of expenses incurred in providing services to the Fund and the potential
for economies of scale, if any; financial data on the Advisor and the
Sub-Advisor; any fall-out benefits to the Advisor and 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. The Board reviewed initial
materials with the Advisor at a special meeting held on April 20, 2015, at which
the Independent Trustees and their counsel met separately to discuss the
information provided by the Advisor and the Sub-Advisor. Following the April
meeting, independent legal counsel on behalf of the Independent Trustees
requested certain clarifications and supplements to the materials provided, and
those were considered at an executive session of the Independent Trustees and
independent legal counsel held prior to the June 16, 2015 meeting, as well as at
Page 29
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2015 (UNAUDITED)
the meeting. 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.
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. The Board considered the significant asset
growth of the First Trust Fund Complex and the Advisor's concomitant investment
in infrastructure and personnel dedicated to the First Trust funds. With respect
to the Sub-Advisory Agreement, the Board noted the background and experience of
the Sub-Advisor's portfolio management team and recent additions to the
Sub-Advisor's staff. The Board considered the services that the Sub-Advisor
provides to the Fund, including the Sub-Advisor's day-to-day management of the
Fund's investments. In 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 provides
advisory services to a closed-end fund and an open-end fund sub-advised by the
Sub-Advisor and to certain separately managed accounts that may have investment
objectives and policies similar to the Fund's. The Board noted that the Advisor
charges similar advisory fee rates to the Fund and the closed-end and open-end
funds and a lower fee rate to the separately managed accounts. The Board noted
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 noted that the Sub-Advisor provides
sub-advisory services to the closed-end and the open-end funds referred to above
and that the sub-advisory fee rates charged for the closed-end and open-end
funds are similar to the sub-advisory fee rate for the Fund. In addition, the
Board reviewed data prepared by MPI showing the advisory fee and expense ratio
(Class A shares) of the Fund as compared to the advisory fees and expense ratios
of the MPI Peer Group. The Board discussed with representatives of the Advisor
the limitations in creating a relevant peer group for the Fund, including that
(i) the Fund is unique in its composition, which makes assembling peers with
similar strategies and asset mix difficult; (ii) most of the peer funds are
larger than the Fund, which causes the Fund's fixed expenses to be higher on a
percentage basis as compared to the larger peer funds; and (iii) some of the
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 MPI Peer Group. The Board considered that the Advisor
and Sub-Advisor agreed to waive fees and/or pay Fund expenses through February
28, 2017 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, 2017 through February 28, 2026 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 MPI comparing the Fund's performance (based on Class A shares)
for the one-year, three-year and since-inception periods ended December 31, 2014
to the performance of the MPI Peer Group and to two benchmark indexes, one of
which is a blended benchmark index. In reviewing the Fund's performance as
compared to the performance of the MPI Peer Group, the Board took into account
the limitations described above with respect to creating a relevant peer group
for the Fund. Based on the information presented, the Board noted that the
Fund's performance was above the average performance for the MPI Peer Group for
the one-year period ended December 31, 2014 and below the average erformance of
the MPI Peer Group for the three-year and since-inception periods ended December
31, 2014.
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 the Sub-Advisor under the Agreements.
Page 30
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2015 (UNAUDITED)
The Board noted that the Advisor has made and continues to make significant
investments 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, 2014, 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 that the sub-advisory fee rate was negotiated at arm's
length between the Advisor and the Sub-Advisor. The Board did not receive
information from the Sub-Advisor as to the profitability of the Sub-Advisory
Agreement to the Sub-Advisor, and concluded that the profitability analysis for
the Advisor was more relevant. 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 31
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BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2015 (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; 117 None
c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate
120 East Liberty Drive, o Since Trust Limited Partnership; Member, Sportsmed LLC
Suite 400 Inception
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Indefinite Term President (March 2010 to Present), Senior 117 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 Merchant) Investor Services
Wheaton, IL 60187 International, and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Indefinite Term President (2003 to Present), Hibs 117 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 117 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 117 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 32
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2015 (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
120 E. Liberty Drive, Executive Officer 2010 to Present) and Chief Financial
Suite 400 o Since January 2012 Officer, First Trust Advisors L.P and
Wheaton, IL 60187 First Trust Portfolios L.P.; Chief
D.O.B.: 11/57 Financial Officer, BondWave LLC
(Software Development 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
120 E. Liberty Drive, Legal Officer Advisors L.P., First Trust Portfolios
Suite 400 o Since Trust Inception L.P.; Secretary and General Counsel,
Wheaton, IL 60187 BondWave LLC (Software
D.O.B.: 05/60 Development Company/Investment
Advisor); Secretary, Stonebridge Advisors
LLC (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
Wheaton, IL 60187 Portfolios 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
D.O.B.: 12/66 January 2011
o Assistant Secretary
since January 2011
-----------------------------
(2) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 33
--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2015 (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 34
This Page Left Blank Intentionally.
This Page Left Blank Intentionally.
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
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, 2015
Confluence Investment Management
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
ANNUAL REPORT
OCTOBER 31, 2015
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 ............................................... 15
Report of Independent Registered Public Accounting Firm ..................... 20
Additional Information ...................................................... 21
Board of Trustees and Officers .............................................. 25
Privacy Policy .............................................................. 27
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.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's web page at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. It includes details about the Fund and presents data and analysis that
provide insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
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 material risks of investing in the
Fund are spelled out in the prospectus, the statement of additional information,
this report and other Fund regulatory filings.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
OCTOBER 31, 2015
Dear Shareholders:
Thank you for your investment in First Trust/Confluence Small Cap Value Fund
(the "Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
annual report which contains detailed information about your investment for the
12 months ended October 31, 2015, including a market overview and a performance
analysis for the period. We encourage you to read this report and discuss it
with your financial advisor.
U.S. markets, fueled by accelerating growth and an accommodating Federal
Reserve, enjoyed a prosperous year in 2014. However, most of 2015 has been
volatile. Economic and global factors, such as the continued conflict in the
Middle East, a sharp decline in oil prices and terrorism around the world, have
impacted U.S. and global markets. Another factor that has weighed upon U.S.
markets for most of the year is the fact that many economists had predicted that
the Federal Reserve would begin to raise interest rates in 2015, which has still
not happened.
As I have written previously, First Trust believes investors should maintain
perspective about the markets and have realistic expectations about their
investments. Markets will always go up and down, but we believe that having a
long-term investment horizon and being invested in quality products can help you
reach your goals.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value the relationship and will continue to focus on our disciplined
investment approach and long-term perspective to help investors reach their
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, 2015 (UNAUDITED)
-----------------------------------------------------------
FUND STATISTICS
-----------------------------------------------------------
NET ASSET
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND VALUE (NAV)
-----------------------------------------------------------
Class A (FOVAX) $26.34
Class C (FOVCX) $24.51
Class I (FOVIX) $26.84
-----------------------------------------------------------
-----------------------------------------------------------
% OF TOTAL
TOP TEN HOLDINGS INVESTMENTS
-----------------------------------------------------------
John Bean Technologies Corp. 4.6%
VCA, Inc. 4.5
Morningstar, Inc. 4.5
Snyders-Lance, Inc. 4.3
Re/Max Holdings, Inc., Class A 4.1
Bank of Marin Bancorp 3.9
Patterson Cos., Inc. 3.8
Landstar System, Inc. 3.7
Graco, Inc. 3.7
Brown & Brown, Inc. 3.6
-------
Total 40.7%
=======
-----------------------------------------------------------
% OF TOTAL
SECTOR ALLOCATION INVESTMENTS
-----------------------------------------------------------
Industrials 33.2%
Financials 31.0
Health Care 19.9
Consumer Discretionary 8.1
Consumer Staples 4.3
Information Technology 3.5
-------
Total 100.0%
=======
Page 2
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
"AT A GLANCE" (CONTINUED)
AS OF OCTOBER 31, 2015 (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 10/31/2015.
First Trust/Confluence
Small Cap Value Fund - Russell 2000(R) Russell 2000(R)
Class I Shares Value Index ("R2000V") Index ("R2000")
1/11/11 $10,000 $10,000 $10,000
4/30/11 10,730 10,966 10,716
10/31/11 9,790 9,457 9,261
4/30/12 10,554 10,499 10,323
10/31/12 10,951 10,599 10,601
4/30/13 12,260 12,309 12,307
10/31/13 13,892 14,023 14,389
4/30/14 14,285 14,720 14,832
10/31/14 15,214 15,129 15,548
4/30/15 15,626 15,439 16,271
10/31/15 15,403 14,693 15,601
--------------------------------------------------------------------------------------------------
PERFORMANCE AS OF OCTOBER 31, 2015
--------------------------------------------------------------------------------------------------
I SHARES
A SHARES C SHARES Inception
Inception 2/24/2011 Inception 3/2/2011 1/11/2011 R2000V* R2000*
--------------------------------------------------------------------------------------------------
W/MAX
1.00%
W/MAX CONTINGENT
W/O 5.50% W/O DEFERRED W/O W/O W/O
AVERAGE ANNUAL SALES SALES SALES SALES SALES SALES SALES
TOTAL RETURNS CHARGES CHARGE CHARGES CHARGE CHARGES CHARGES CHARGES
1 Year 1.22% -4.34% 0.33% -0.60% 1.23% -2.88% 0.34%
Since Inception 9.04% 7.73% 7.37% 7.37% 9.41% 8.34% 9.70%
*Since inception return is based on the Class I Shares inception date.
Performance figures assume reinvestment of all 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 Shares do not have a front-end sales charge
or a CDSC, nor do they pay distribution or service fees.
Page 3
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
ANNUAL REPORT
OCTOBER 31, 2015
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 various market
capitalization securities in a wide range of industries 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 (PORTFOLIO
MANAGER FOR THE FUND FROM 2011 THROUGH OCTOBER 31, 2015)
DANIEL WINTER, CFA - SENIOR VICE PRESIDENT AND PORTFOLIO MANAGER
CHRIS STEIN - VICE PRESIDENT AND PORTFOLIO MANAGER
THOMAS W. DUGAN, CFA - ASSOCIATE VICE PRESIDENT AND PORTFOLIO MANAGER (PORTFOLIO
MANAGER FOR THE FUND FROM NOVEMBER 1, 2015)
COMMENTARY
MARKET RECAP
The small capitalization equity markets results for the Fund's fiscal year ended
on October 31, 2015 were relatively weak compared to the prior years as the
Russell 2000(R) Index and Russell 2000(R) Value Index posted results of 0.34%
and -2.88%, respectively.
While the Federal Reserve's accommodative policy receives a lot of the credit
for the strong markets the past few years, the strength in the equity markets
could also be attributed to: expanding profit margins; increasing consumer
confidence; lower starting valuations; and an improving economy. So why did the
fiscal year that ended October 31, 2015 turn out to be such a tough year for
investors? For starters, it was the first time since 2009 there was no tailwind
from the Federal Reserve's Quantitative Easing Program, which ended in October
2014, and, more importantly, there was the prospect of the first Fed Funds rate
increase since 2006. This created a lot of anxiety as to the timing of the first
rate increase and the pace and magnitude of any future increase. This is normal
behavior as the Federal Reserve's past moves in moving rates upward have been
the primary cause of recessions post-World War II. Investor reaction to the
uncertainty contributed to heightened volatility. There was also a correction of
over 10% during the summer. Monetary policy was not solely responsible for the
correction, as the economy also faced a strengthening dollar, collapsing
commodity prices, and further weakening in China and other emerging markets.
These factors combined to cloud economic prospects. This caused investors to
reevaluate their exposure to equities for the first time in years and reassess
their expectations. This is a normal and healthy process and should provide
better opportunities for long-term investors, such as ourselves.
Regarding the Fund, the Class I Shares generated gains of 1.23% during the
Fund's fiscal year ended October 31, 2015, outperforming the benchmarks. From
inception (1/11/2011) through the end of October, the Fund is up 9.41%, on an
annualized basis, which is generally in line with the performance of the Russell
2000(R) and Russell 2000(R) Value Indexes which posted gains of 9.70% and 8.43%,
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, 2015, sector results were rather
bifurcated with the commodity-oriented sectors, Energy and Materials, posting
large negative declines for the Indexes while Consumer Staples and Health Care
posted positive results. For the Fund, the relative weightings and performance
of the Consumer Discretionary, Energy and Industrial sectors were positive
contributors to relative performance. The Information Technology sector was the
main detractor to relative performance (see attribution table).
Page 4
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
ANNUAL REPORT
OCTOBER 31, 2015
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 2000V 2000
Consumer Discretionary 12.05 (3.08) 14.49 (0.20) 7.00 18.87 1.08 1.04
Consumer Staples 2.74 11.54 3.03 6.55 3.49 21.64 0.42 0.53
Energy 3.63 (53.87) 2.86 (48.53) 0.49 (35.42) 2.04 1.15
Financials 42.01 2.95 24.49 3.34 28.79 4.09 (0.68) 0.16
Health Care 5.21 9.30 15.66 9.11 18.71 2.79 0.04 (1.03)
Industrials 12.66 (6.72) 13.38 (5.06) 31.79 1.55 1.39 0.64
Information Technology 9.91 2.90 17.20 9.79 2.54 (2.55) (0.69) (1.73)
Materials 4.12 (22.27) 4.35 (14.21) 0.45 (5.55) 0.62 0.44
Telecom Services 0.84 (0.74) 0.91 0.49 0.00 0.00 (0.01) 0.02
Utilities 6.80 1.90 3.63 0.29 0.00 0.00 (0.28) 0.04
Cash 0.00 0.00 0.00 0.00 6.75 0.03 (0.02) (0.43)
--------------------------------------------------------------------------------------------------------------------------
Sources: Factset and Confluence Investment Management. Index Data is based on
the respective Exchange Traded Fund (iShares Russell 2000 and Russell 2000
Value).
Our 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' affection. With the small capitalization indexes,
Russell 2000(R) and Russell 2000(R) 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.
Our 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 Consumer Discretionary sector, the Fund benefited from solid returns from
Culp (CFI) which posted returns of 60% and more than offset the weakness in
Potbelly (PBPB) and Tumi (TUMI) which were down approx. -12% in the Fund. In the
Industrials sector, the Fund benefited from John Bean Technologies (JBT), up
50%, and Exponent (EXPO), up 30%, which offset weakness in Raven Industries
(RAVN), down -24%, and Thermon Group (THR), down -17%. The Energy sector
benefited from an underweighting in the sector although the Fund did sell C&J
Energy Services (CJES) during the fiscal year.
The Fund's relative weakness in the Information Technology sector was driven by
the underweighting in the sector and the performance of MTS Systems (MTSC) which
was down -2.5%.
MARKET AND FUND OUTLOOK:
Our current view calls for a lengthy period of rising but low interest rates as
the employment landscape remains sluggish with a low participation rate. There
is also ample global capacity which should keep inflation subdued. We expect to
see a very slow pace of rate increases. This should allow the economy to
maintain growth and equities to maintain their footing in spite of higher
interest rates, albeit with higher volatility.
As always, we remain focused on company-specific fundamentals and growth
prospects, and believe the current market will continue to provide us 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, 2015 (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 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, 2015.
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 5/01/2015 - VALUE VALUE 5/01/2015 - EXPENSE
5/01/2015 10/31/2015 10/31/2015 (a) 5/01/2015 10/31/2015 10/31/2015 (a) RATIOS (b)
--------------------------------------------------------------------------------------------------------
Class A $ 1,000.00 $ 987.60 $ 8.02 $ 1,000.00 $ 1,017.14 $ 8.13 1.60%
Class C 1,000.00 980.80 11.73 1,000.00 1,013.36 11.93 2.35
Class I 1,000.00 985.70 6.76 1,000.00 1,018.40 6.87 1.35
(a) Expenses are equal to the annualized expense ratios, multiplied by the
average account value over the period (May 1, 2015 through October 31,
2015), 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, 2015
SHARES DESCRIPTION VALUE
------------- ---------------------------------------------------------------------------- --------------
COMMON STOCKS - 85.7%
AIR FREIGHT & LOGISTICS - 2.9%
2,885 Forward Air Corp............................................................ $ 130,864
--------------
BANKS - 3.6%
3,025 Bank of Marin Bancorp....................................................... 160,870
--------------
CAPITAL MARKETS - 2.6%
16,640 PennantPark Investment Corp. (a)............................................ 114,982
--------------
COMMERCIAL SERVICES & SUPPLIES - 1.7%
2,962 Ritchie Bros. Auctioneers, Inc.............................................. 76,923
--------------
DIVERSIFIED FINANCIAL SERVICES - 4.1%
2,224 Morningstar, Inc............................................................ 182,613
--------------
ELECTRICAL EQUIPMENT - 5.9%
3,870 Franklin Electric Co., Inc.................................................. 127,555
6,787 Thermon Group Holdings, Inc. (b)............................................ 136,487
--------------
264,042
--------------
ELECTRONIC EQUIPMENT, INSTRUMENTS & COMPONENTS - 3.2%
2,173 MTS Systems Corp............................................................ 143,483
--------------
FOOD PRODUCTS - 3.9%
4,941 Snyder's-Lance, Inc......................................................... 175,603
--------------
HEALTH CARE EQUIPMENT & SUPPLIES - 7.9%
3,515 Haemonetics Corp. (b)....................................................... 118,737
3,464 Halyard Health, Inc. (b).................................................... 102,811
2,194 West Pharmaceutical Services, Inc........................................... 131,662
--------------
353,210
--------------
HEALTH CARE PROVIDERS & SERVICES - 7.6%
3,265 Patterson Cos., Inc......................................................... 154,761
3,395 VCA, Inc. (b)............................................................... 185,944
--------------
340,705
--------------
HOTELS, RESTAURANTS & LEISURE - 2.8%
11,053 Potbelly Corp. (b).......................................................... 123,794
--------------
INDUSTRIAL CONGLOMERATES - 3.0%
7,305 Raven Industries, Inc....................................................... 133,024
--------------
INSURANCE - 8.4%
4,620 Brown & Brown, Inc.......................................................... 149,087
1,600 National Interstate Corp.................................................... 45,920
9,545 OneBeacon Insurance Group Ltd., Class A..................................... 137,352
723 RLI Corp.................................................................... 43,995
--------------
376,354
--------------
LIFE SCIENCES TOOLS & SERVICES - 2.7%
1,377 Bio-Techne Corp............................................................. 121,451
--------------
MACHINERY - 10.5%
2,060 Graco, Inc.................................................................. 151,204
4,217 John Bean Technologies Corp................................................. 189,175
4,154 Mueller Industries, Inc..................................................... 130,934
--------------
471,313
--------------
See Notes to Financial Statements Page 7
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
SHARES DESCRIPTION VALUE
------------- ---------------------------------------------------------------------------- --------------
COMMON STOCKS (CONTINUED)
PROFESSIONAL SERVICES - 3.0%
2,618 Exponent, Inc............................................................... $ 134,591
--------------
REAL ESTATE MANAGEMENT & DEVELOPMENT - 3.8%
4,513 RE/MAX Holdings, Inc., Class A.............................................. 170,005
--------------
ROAD & RAIL - 3.4%
2,406 Landstar System, Inc........................................................ 151,674
--------------
TEXTILES, APPAREL & LUXURY GOODS - 4.7%
3,393 Culp, Inc................................................................... 101,824
6,687 Tumi Holdings, Inc. (b)..................................................... 107,193
--------------
209,017
--------------
TOTAL COMMON STOCKS......................................................... 3,834,518
(Cost $3,362,358) --------------
REAL ESTATE INVESTMENT TRUSTS - 6.0%
8,450 Gladstone Commercial Corp................................................... 135,285
5,888 Rayonier, Inc............................................................... 133,363
--------------
TOTAL REAL ESTATE INVESTMENT TRUSTS......................................... 268,648
(Cost $291,262) --------------
TOTAL INVESTMENTS - 91.7%................................................... 4,103,166
(Cost $3,653,620) (c)
NET OTHER ASSETS AND LIABILITIES - 8.3%..................................... 369,697
--------------
NET ASSETS - 100.0%......................................................... $ 4,472,863
==============
-----------------------------
(a) Business Development Company
(b) Non-income producing security.
(c) Aggregate cost for federal income tax purposes is $3,653,620. As of
October 31, 2015, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$692,913 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$243,367.
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of October 31,
2015 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 10/31/2015 PRICES INPUTS INPUTS
--------------------------------------------------- ------------- ------------- ------------- -------------
Common Stocks...................................... $ 3,834,518 $ 3,834,518 $ -- $ --
Real Estate Investment Trusts...................... 268,648 268,648 -- --
------------- ------------- ---------- ----------
Total Investments.................................. $ 4,103,166 $ 4,103,166 $ -- $ --
============= ============= ========== ==========
*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, 2015.
Page 8 See Notes to Financial Statements
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2015
ASSETS:
Investments, at value
(Cost $3,653,620)........................................................................... $ 4,103,166
Cash........................................................................................... 338,632
Prepaid expenses............................................................................... 32,017
Receivables:
Investment securities sold.................................................................. 69,010
From investment advisor..................................................................... 31,199
Dividends................................................................................... 2,664
Fund shares sold............................................................................ 35
------------
Total Assets................................................................................ 4,576,723
------------
LIABILITIES:
Payables:
Audit and tax fees.......................................................................... 32,800
Administrative fees......................................................................... 30,625
Printing fees............................................................................... 12,077
Investment securities purchased............................................................. 8,516
Transfer agent fees......................................................................... 5,879
Registration fees........................................................................... 3,055
Legal fees.................................................................................. 2,741
12b-1 distribution and service fees......................................................... 2,143
Custodian fees.............................................................................. 1,626
Trustees' fees and expenses................................................................. 1,337
Commitment fees............................................................................. 869
Financial reporting fees.................................................................... 771
Other liabilities.............................................................................. 1,421
------------
Total Liabilities........................................................................... 103,860
------------
NET ASSETS..................................................................................... $ 4,472,863
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $ 3,952,547
Par value...................................................................................... 1,756
Accumulated net investment income (loss)....................................................... (2,440)
Accumulated net realized gain (loss) on investments............................................ 71,454
Net unrealized appreciation (depreciation) on investments...................................... 449,546
------------
NET ASSETS..................................................................................... $ 4,472,863
============
MAXIMUM OFFERING PRICE PER SHARE:
CLASS A SHARES:
Net asset value and redemption price per share (Based on net assets of $1,413,019 and
53,653 shares of beneficial interest issued and outstanding)................................ $ 26.34
Maximum sales charge (5.50% of offering price)................................................. 1.53
------------
Maximum offering price to public............................................................... $ 27.87
============
CLASS C SHARES:
Net asset value and redemption price per share (Based on net assets of $2,246,801 and
91,672 shares of beneficial interest issued and outstanding)................................ $ 24.51
============
CLASS I SHARES:
Net asset value and redemption price per share (Based on net assets of $813,043 and
30,287 shares of beneficial interest issued and outstanding)................................ $ 26.84
============
See Notes to Financial Statements Page 9
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2015
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $412)............................................. $ 76,575
Interest....................................................................................... 104
------------
Total investment income..................................................................... 76,679
------------
EXPENSES:
Transfer agent fees............................................................................ 70,528
Administrative fees............................................................................ 61,121
Registration fees.............................................................................. 54,608
Investment advisory fees....................................................................... 43,411
Audit and tax fees............................................................................. 32,801
12b-1 distribution and/or service fees:
Class A..................................................................................... 3,623
Class C..................................................................................... 21,610
Class R3.................................................................................... 3
Printing fees.................................................................................. 17,918
Trustees' fees and expenses.................................................................... 16,036
Commitment fees................................................................................ 11,434
Financial reporting fees....................................................................... 9,250
Custodian fees................................................................................. 2,812
Legal fees..................................................................................... 2,547
Listing expense................................................................................ 2,000
Other.......................................................................................... 2,077
------------
Total expenses.............................................................................. 351,779
Fees waived and expenses reimbursed by the investment advisor............................... (267,934)
------------
Net expenses................................................................................... 83,845
------------
NET INVESTMENT INCOME (LOSS)................................................................... (7,166)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments..................................................... 90,481
Net change in unrealized appreciation (depreciation) on investments......................... (43,891)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ 46,590
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 39,424
============
Page 10 See Notes to Financial Statements
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
10/31/2015 10/31/2014
------------ ------------
OPERATIONS:
Net investment income (loss)................................................... $ (7,166) $ (13,810)
Net realized gain (loss)....................................................... 90,481 282,669
Net change in unrealized appreciation (depreciation)........................... (43,891) 49,701
------------ ------------
Net increase (decrease) in net assets resulting from operations................ 39,424 318,560
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET REALIZED GAIN:
Class A Shares................................................................. (80,157) (55,654)
Class C Shares................................................................. (153,521) (88,218)
Class I Shares................................................................. (40,367) (11,590)
Class R3 Shares................................................................ (102) (56)
------------ ------------
Total distributions to shareholders............................................ (274,147) (155,518)
------------ ------------
CAPITAL TRANSACTIONS:
Proceeds from shares sold ..................................................... 1,949,851 791,907
Proceeds from shares reinvested................................................ 239,525 133,876
Cost of shares redeemed........................................................ (1,196,598) (894,811)
------------ ------------
Net increase (decrease) in net assets resulting from capital transactions...... 992,778 30,972
------------ ------------
Total increase (decrease) in net assets........................................ 758,055 194,014
------------ ------------
NET ASSETS:
Beginning of period............................................................ 3,714,808 3,520,794
------------ ------------
End of period.................................................................. $ 4,472,863 $ 3,714,808
============ ============
Accumulated net investment income (loss) at end of period...................... $ (2,440) $ --
============ ============
See Notes to Financial Statements Page 11
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED OCTOBER 31, PERIOD
----------------------------------------------------------------- ENDED
CLASS A SHARES 2015 2014 2013 2012 10/31/2011 (d)
-------------- -------------- -------------- -------------- --------------
Net asset value, beginning of period........ $ 28.03 $ 26.77 $ 21.58 $ 19.54 $ 20.10
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (a)............ 0.04 0.00 (e) 0.10 0.23 0.03
Net realized and unrealized gain (loss)..... 0.31 2.39 5.46 1.85 (0.59)
---------- ---------- ---------- ---------- ----------
Total from investment operations............ 0.35 2.39 5.56 2.08 (0.56)
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income....................... -- -- (0.27) (0.04) --
Net realized gain........................... (2.04) (1.13) (0.10) -- --
---------- ---------- ---------- ---------- ----------
Total distributions......................... (2.04) (1.13) (0.37) (0.04) --
---------- ---------- ---------- ---------- ----------
Net asset value, end of period.............. $ 26.34 $ 28.03 $ 26.77 $ 21.58 $ 19.54
========== ========== ========== ========== ==========
TOTAL RETURN (b)............................ 1.22% 9.23% 26.16% 10.61% (2.79)%
========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........ $ 1,413 $ 1,144 $ 1,288 $ 651 $ 218
Ratio of total expenses to average net
assets................................... 7.61% 8.65% 11.29% 23.94% 60.42% (c)
Ratio of net expenses to average net
assets................................... 1.60% 1.60% 1.60% 1.60% 1.60% (c)
Ratio of net investment income (loss) to
average net assets....................... 0.16% 0.00% (f) 0.42% 1.10% 0.26% (c)
Portfolio turnover rate..................... 17% 39% 31% 11% 21%
(a) Per share amounts have been calculated using the average shares method.
(b) 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.
(c) Annualized.
(d) Class A Shares commenced operations on February 24, 2011.
(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 ENDED OCTOBER 31, PERIOD
----------------------------------------------------------------- ENDED
CLASS C SHARES 2015 2014 2013 2012 10/31/2011 (d)
-------------- -------------- -------------- -------------- --------------
Net asset value, beginning of period........ $ 26.44 $ 25.51 $ 20.59 $ 18.81 $ 20.10
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (a)............ (0.14) (0.19) (0.10) 0.05 (0.07)
Net realized and unrealized gain (loss)..... 0.25 2.25 5.23 1.73 (1.22)
---------- ---------- ---------- ---------- ----------
Total from investment operations............ 0.11 2.06 5.13 1.78 (1.29)
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income....................... -- -- (0.11) -- --
Net realized gain........................... (2.04) (1.13) (0.10) -- --
---------- ---------- ---------- ---------- ----------
Total distributions......................... (2.04) (1.13) (0.21) -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of period.............. $ 24.51 $ 26.44 $ 25.51 $ 20.59 $ 18.81
========== ========== ========== ========== ==========
TOTAL RETURN (b)............................ 0.33% 8.36% 25.11% 9.46% (6.42)%
========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........ $ 2,247 $ 1,977 $ 1,956 $ 615 $ 8
Ratio of total expenses to average net
assets................................... 7.93% 8.81% 10.45% 26.69% 98.09% (c)
Ratio of net expenses to average net
assets................................... 2.35% 2.35% 2.35% 2.35% 2.35% (c)
Ratio of net investment income (loss) to
average net assets....................... (0.57)% (0.73)% (0.43)% 0.25% (0.54)% (c)
Portfolio turnover rate..................... 17% 39% 31% 11% 21%
(a) Per share amounts have been calculated using the average shares method.
(b) 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.
(c) Annualized.
(d) Class C Shares commenced operations on March 2, 2011.
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 ENDED OCTOBER 31, PERIOD
----------------------------------------------------------------- ENDED
CLASS I SHARES 2015 2014 2013 2012 10/31/2011 (d)
-------------- -------------- -------------- -------------- --------------
Net asset value, beginning of period........ $ 28.52 $ 27.15 $ 21.81 $ 19.58 $ 20.00
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (a)............ 0.10 0.08 0.16 0.26 0.07
Net realized and unrealized gain (loss)..... 0.26 2.42 5.60 2.05 (0.49)
---------- ---------- ---------- ---------- ----------
Total from investment operations............ 0.36 2.50 5.76 2.31 (0.42)
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income....................... -- -- (0.32) (0.08) --
Net realized gains.......................... (2.04) (1.13) (0.10) -- --
---------- ---------- ---------- ---------- ----------
Total distributions......................... (2.04) (1.13) (0.42) (0.08) --
---------- ---------- ---------- ---------- ----------
Net asset value, end of period.............. $ 26.84 $ 28.52 $ 27.15 $ 21.81 $ 19.58
========== ========== ========== ========== ==========
TOTAL RETURN (b)............................ 1.23% 9.51% 26.85% 11.85% (2.10)%
========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........ $ 813 $ 592 $ 276 $ 141 $ 164
Ratio of total expenses to average net
assets................................... 8.46% 11.05% 17.52% 41.80% 103.62% (c)
Ratio of net expenses to average net
assets................................... 1.35% 1.35% 1.35% 1.35% 1.35% (c)
Ratio of net investment income (loss) to
average net assets....................... 0.38% 0.28% 0.66% 1.28% 0.43% (c)
Portfolio turnover rate..................... 17% 39% 31% 11% 21%
(a) Per share amounts have been calculated using the average shares method.
(b) 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
timer period presented and is not annualized for periods less than one
year.
(c) Annualized.
(d) Class I Shares were initially seeded on December 16, 2010 and commenced
operations on January 11, 2011.
Page 14 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2015
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
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 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 Fund, which is an investment company within the scope of Financial
Accounting Standards Board ("FASB") Accounting Standards Update 2013-08, follows
accounting and reporting guidance under FASB Accounting Standards Codification
Topic 946, "Financial Services-Investment Companies." The following is a summary
of significant accounting policies consistently followed by the Fund in the
preparation of the financial statements. The preparation of the 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, real estate investment trusts ("REITs") and other
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.
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
Page 15
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2015
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;
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 methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of October 31, 2015, 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 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, 2015, resulting
in book and tax accounting differences, have been reclassified at year end to
reflect an increase in accumulated net investment income (loss) of $4,726, a
decrease in accumulated net realized gain (loss) on investments of $4,203, and a
decrease to paid-in capital of $523. Net assets were not affected by this
reclassification.
Page 16
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2015
The tax character of distributions paid during the fiscal years ended October
31, 2015 and 2014 was as follows:
Distributions paid from: 2015 2014
Ordinary income............................ $ 95,195 $ 42,149
Capital gain............................... 178,952 113,369
Return of capital.......................... -- --
As of October 31, 2015, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income.............. $ --
Undistributed capital gains................ 71,454
------------
Total undistributed earnings............... 71,454
Accumulated capital and other losses....... (2,440)
Net unrealized appreciation (depreciation). 449,546
------------
Total accumulated earnings (losses)........ 518,560
Other...................................... --
Paid-in capital............................ 3,954,303
------------
Net assets................................. $ 4,472,863
============
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 and state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
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, 2015, the
Fund had no non-expiring capital loss carryforwards for federal income tax
purposes.
Certain losses realized during the current fiscal year may be deferred and
treated as occurring on the first day of the following fiscal year for federal
income tax purposes. For the fiscal year ended October 31, 2015, the Fund
incurred and elected to defer $2,440 in net ordinary losses.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ended 2012, 2013,
2014, and 2015 remain open to federal and state audit. As of October 31, 2015,
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 receives 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, 2017 and then will not exceed 1.70% from March 1, 2017 to February
28, 2026 (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
Page 17
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2015
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 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, 2015 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 2013 2014 2015 TOTAL
------------ ------------ ------------ ------------ ------------ ------------
$ 43,411 $ 224,523 $ 236,557 $ 283,909 $ 267,934 $ 788,400
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, 2015 OCTOBER 31, 2014
SHARES VALUE SHARES VALUE
---------- ------------- ---------- -------------
Sales:
Class A 46,377 $ 1,205,524 11,125 $ 296,008
Class C 14,150 356,344 7,955 200,103
Class I 14,064 387,983 11,091 295,796
Class R3* -- -- -- --
---------- ------------- ---------- -------------
Total Sales: 74,591 $ 1,949,851 30,171 $ 791,907
========== ============= ========== =============
Dividend Reinvestment:
Class A 2,231 $ 59,057 1,560 $ 40,885
Class C 5,746 42,694 3,327 82,837
Class I 1,400 37,774 381 10,154
Class R3* -- -- -- --
---------- ------------- ---------- -------------
Total Dividend Reinvestment: 9,377 $ 239,525 5,268 $ 133,876
========== ============= ========== =============
Redemptions:
Class A (35,778) $ (957,963) (19,967) $ (534,713)
Class C (2,998) (75,107) (13,160) (336,696)
Class I (5,946) (162,207) (865) (23,402)
Class R3* (50) (1,321) -- --
---------- ------------- ---------- -------------
Total Redemptions: (44,722) $ (1,196,598) (33,992) $ (894,811)
========== ============= ========== =============
* Effective March 20, 2015, all oustanding Class R3 Shares were redeemed and no
Class R3 Shares are currently available for purchase.
Page 18
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2015
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, 2015, were $1,248,869 and $698,160,
respectively.
6. BORROWINGS
The Trust, First Trust Exchange-Traded Fund III and First Trust Exchange-Traded
Fund IV have an $80 million Credit Agreement with The Bank of Nova Scotia
("Scotia") as administrative agent for a group of lenders. Prior to March 26,
2015, 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. Effective March 26, 2015, the commitment fee was changed to
0.15%. First Trust allocates the commitment fee 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, 2015.
7. DISTRIBUTION AND SERVICE PLANS
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 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. Class I shares have no 12b-1 fees.
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 was
the following subseqent event:
At a meeting on December 7, 2015, the Board accepted Mr. Bradley's resignation
from his position as the President and Chief Executive Officer of the Fund,
effective December 31, 2015. At the same meeting, the Board elected Mr. Dykas to
serve as the President and Chief Executive Officer and Mr. Donald Swade,
formerly an Assistant Treasurer of the Fund, to serve as the Treasurer, Chief
Financial Officer and Chief Accounting Officer of the Fund.
Page 19
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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, 2015, 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 audit 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, 2015 by correspondence with the Fund's
custodian and brokers; when replies were not received from brokers, we performed
other auditing procedures. We believe that our audit provides 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, 2015, 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
/s/ Deloitte & Touche LLP
Chicago, Illinois
December 22, 2015
Page 20
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2015 (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 Form N-Qs
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com;
(3) on the SEC's website at http://www.sec.gov; and (4) for review and copying
at the SEC's Public Reference Room ("PRR") in Washington, DC. Information
regarding the operation of the PRR may be obtained by calling (800) SEC-0330.
TAX INFORMATION
The Fund hereby designates as qualified dividend income 45.69% of its ordinary
income distributions (including short-term capital gains, if applicable) for the
period ended October 31, 2015. 41.90% of the ordinary income (including
short-term capital gain, if applicable) distributions made by the Fund during
the period ended October 31, 2015, qualify for corporate dividends received
deduction available to corporate shareholders.
For the year ended October 31, 2015, the amount of long-term capital gain
distributions designated by the Fund was $178,952 which is taxable at a maximum
rate of 15% for federal income tax purposes.
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.
Page 21
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2015 (UNAUDITED)
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.
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 16, 2015. The Board determined that the continuation of the
Agreements is in the best interests of the Fund in light of the extent and
quality of the services provided and such other matters as the Board considered
to be relevant in the exercise of its reasonable business judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. At meetings held on April 20, 2015 and June 16, 2015, the
Board, including the Independent Trustees, reviewed materials provided by the
Advisor and the Sub-Advisor responding to requests for information from counsel
to the Independent Trustees that, among other things, outlined the services
provided by the Advisor and the Sub-Advisor (including the relevant personnel
responsible for these services and their experience); the advisory and
sub-advisory 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 to a peer group
of funds selected by Management Practice, Inc. ("MPI"), an independent source
(the "MPI Peer Group"); expenses of the Fund as compared to expense ratios of
the funds in the MPI Peer Group; performance information for the Fund; the
nature of expenses incurred in providing services to the Fund and the potential
for economies of scale, if any; financial data on the Advisor and the
Sub-Advisor; any fall out benefits to the Advisor and 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. The Board reviewed initial
materials with the Advisor at a special meeting held on April 20, 2015, at which
the Independent Trustees and their counsel met separately to discuss the
information provided by the Advisor and the Sub-Advisor. Following the April
meeting, independent legal counsel on behalf of the Independent Trustees
requested certain clarifications and supplements to the materials provided, and
those were considered at an executive session of the Independent Trustees and
independent legal counsel held prior to the June 16, 2015 meeting, as well as at
the meeting. The Board applied its business judgment to determine whether the
arrangements between the Trust and the Advisor and among the Trust, the Advisor
Page 22
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2015 (UNAUDITED)
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.
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. The Board considered the significant asset
growth of the First Trust Fund Complex and the Advisor's concomitant investment
in infrastructure and personnel dedicated to the First Trust funds. 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. 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 MPI showing the advisory fee and expense
ratio (Class A shares) of the Fund as compared to the advisory fees and expense
ratios of the MPI Peer Group. The Board discussed with representatives of the
Advisor the limitations in creating a relevant peer group for the Fund,
including that (i) all 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 of the 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 MPI Peer Group. The Board considered that the Advisor and
Sub-Advisor agreed to waive fees and/or pay Fund expenses through February 28,
2017 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, 2017 through February 28, 2026 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 MPI comparing the Fund's performance (based on Class A shares)
for the one-year, three-year and since-inception periods ended December 31, 2014
to the performance of the MPI Peer Group and to two benchmark indexes. In
reviewing the Fund's performance as compared to the performance of the MPI Peer
Group, the Board took into account the limitations described above with respect
to creating a relevant peer group for the Fund. Based on the information
presented, the Board noted that the Fund's performance was the highest in the
MPI Peer Group for the one-year period and below the median of the MPI Peer
Group for the three-year and since-inception periods ended December 31, 2014,
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 the Sub-Advisor under the Agreements.
The Board noted that the Advisor has made and continues to make significant
investments 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, 2014, 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
Page 23
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2015 (UNAUDITED)
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 that many of the Sub Advisor's costs are fixed, allowing
for economies of scale with regard to certain costs. 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 2014 as a result of fee waivers and expense reimbursements. The Board
considered fall out benefits realized by the Sub Advisor and one of its
affiliates from the relationship with the Fund. The Board noted that beginning
in 2014, the Sub Advisor entered into soft dollar arrangements and that the
Sub-Advisor stated that all credits obtained using soft dollars were used on
behalf of 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 24
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2015 (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; 117 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 117 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 117 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 117 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 117 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 25
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2015 (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/
Wheaton, IL 60187 Investment Advisor); Secretary of Stonebridge
D.O.B.: 05/60 Advisors LLC (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 Advisors 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 26
--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2015 (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 27
This Page Left Blank Intentionally.
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
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, 2015
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
ANNUAL REPORT
OCTOBER 31, 2015
Shareholder Letter........................................................... 1
At a Glance.................................................................. 2
Portfolio Commentary......................................................... 4
Understanding Your Fund Expenses............................................. 7
Portfolio of Investments..................................................... 8
Statement of Assets and Liabilities.......................................... 22
Statement of Operations...................................................... 23
Statements of Changes in Net Assets.......................................... 24
Financial Highlights......................................................... 25
Notes to Financial Statements................................................ 28
Report of Independent Registered Public Accounting Firm...................... 34
Additional Information....................................................... 35
Board of Trustees and Officers............................................... 39
Privacy Policy............................................................... 41
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.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's webpage at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. It includes details about the Fund and presents data and analysis that
provide insight into the Fund's performance.
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 material risks of investing in
the Fund are spelled out in the prospectus, the statement of additional
information, this report and other Fund regulatory filings.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
OCTOBER 31, 2015
Dear Shareholders:
Thank you for your investment in First Trust Short Duration High Income Fund
(the "Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
annual report which contains detailed information about your investment for the
12 months ended October 31, 2015, including a market overview and a performance
analysis for the period. We encourage you to read this report and discuss it
with your financial advisor.
U.S. markets, fueled by accelerating growth and an accommodating Federal
Reserve, enjoyed a prosperous year in 2014. However, most of 2015 has been
volatile. Economic and global factors, such as the continued conflict in the
Middle East, a sharp decline in oil prices and terrorism around the world, have
impacted U.S. and global markets. Another factor that has weighed upon U.S.
markets for most of the year is the fact that many economists had predicted that
the Federal Reserve would begin to raise interest rates in 2015, which has still
not happened.
As I have written previously, First Trust believes investors should maintain
perspective about the markets and have realistic expectations about their
investments. Markets will always go up and down, but we believe that having a
long-term investment horizon and being invested in quality products can help you
reach your goals.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value the relationship and will continue to focus on our disciplined
investment approach and long-term perspective to help investors reach their
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, 2015 (UNAUDITED)
-----------------------------------------------------------
FUND STATISTICS
-----------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH NET ASSET
INCOME FUND VALUE (NAV)
-----------------------------------------------------------
Class A (FDHAX) $19.83
Class C (FDHCX) $19.81
Class I (FDHIX) $19.83
-----------------------------------------------------------
-----------------------------------------------------------
% OF TOTAL
CREDIT QUALITY(1) INVESTMENTS
-----------------------------------------------------------
BBB 0.2%
BB+ 2.8
BB 7.6
BB- 14.1
B+ 21.0
B 24.7
B- 15.1
CCC+ 11.4
CCC 1.2
CCC- 0.2
CC 0.2
NR 0.5
Privately rated securities 1.0
-------
Total 100.0%
=======
-----------------------------------------------------------
% OF TOTAL
TOP TEN ISSUERS INVESTMENTS
-----------------------------------------------------------
New HB Acquisition LLC 2.4%
Charter Communications Operating LLC 2.3
Level 3 Financing, Inc. 2.1
Tenet Healthcare Corp. 2.1
Caesars Growth Partners LLC 2.0
Albertsons LLC 2.0
Valeant Pharmaceuticals International, Inc. 1.9
BJ's Wholesale Club, Inc. 1.9
Portillo's Holdings LLC 1.9
Amaya Holdings B.V. 1.8
-------
Total 20.4%
=======
-----------------------------------------------------------
% OF TOTAL
INDUSTRY CLASSIFICATION INVESTMENTS
-----------------------------------------------------------
Hotels, Restaurants & Leisure 12.8%
Media 11.2
Health Care Providers & Services 9.7
Pharmaceuticals 7.1
Food Products 5.4
Life Sciences Tools & Services 5.3
Diversified Telecommunication Services 5.1
Health Care Equipment & Supplies 4.1
Food & Staples Retailing 4.1
Software 3.6
Specialty Retail 3.2
Commercial Services & Supplies 2.1
Diversified Consumer Services 1.9
Professional Services 1.7
Insurance 1.7
Wireless Telecommunication Services 1.7
Real Estate Management & Development 1.7
Aerospace & Defense 1.6
Diversified Financial Services 1.6
Chemicals 1.5
Containers & Packaging 1.3
Real Estate Investment Trusts 1.3
Health Care Technology 1.1
Oil, Gas & Consumable Fuels 1.0
Building Products 1.0
Auto Components 1.0
Road & Rail 1.0
IT Services 0.9
Independent Power and Renewable Electricity
Producers 0.6
Consumer Finance 0.6
Semiconductors & Semiconductor Equipment 0.6
Diversified Business Services 0.5
Electronic Equipment & Instruments 0.5
Capital Markets 0.4
Trading Companies & Distributors 0.4
Automobiles 0.3
Technology Hardware, Storage & Peripherals 0.2
Electric Utilities 0.2
Machinery 0.0*
-------
Total 100.0%
=======
--------------------------------------------------------------------------------
CLASS CLASS CLASS
DIVIDEND DISTRIBUTIONS A SHARES C SHARES I SHARES
--------------------------------------------------------------------------------
Current Monthly Distribution per Share (2) $0.0738 $0.0612 $0.0780
Current Distribution Rate on NAV (3) 4.47% 3.71% 4.72%
* Amount represents less than 0.1%.
(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 its 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 the
issue is not rated. 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 10/31/2015. 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 10/31/2015. Subject to change in the future.
Page 2
FIRST TRUST SHORT DURATION HIGH INCOME FUND
"AT A GLANCE" (CONTINUED)
AS OF OCTOBER 31, 2015 (UNAUDITED)
-----------------------------------------------------------
PERFORMANCE OF A $10,000 INVESTMENT
-----------------------------------------------------------
This chart compares your Fund's Class I performance to that
of the BofA Merrill Lynch US High Yield Constrained Index,
the S&P/LSTA Leveraged Loan Index and the Blended Index(a)
from 11/1/2012 through 10/31/2015.
First Trust Short BofA
Duration High Merrill Lynch U.S. S&P/LSTA
Income Fund - Blended High Yield 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
4/30/15 11,460 11,411 11,679 11,144
10/31/15 11,282 11,112 11,270 10,947
(a) The Blended Index return is a 50/50 split between the BofA Merrill Lynch
US High Yield Constrained Index and the S&P/LSTA Leveraged Loan Index
returns.
-----------------------------------------------------------------------------------------------------------------------------
PERFORMANCE AS OF OCTOBER 31, 2015
-----------------------------------------------------------------------------------------------------------------------------
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 0.63% -2.87% -0.12% -1.09% 0.88% -0.77% -2.03% 0.46%
Since Inception 3.84% 2.61% 3.06% 3.06% 4.09% 3.59% 4.07% 3.06%
30-Day SEC Yield(1) 4.10% 3.49% 4.49% N/A N/A N/A
* Since inception return is based on inception date of the Fund.
Performance figures assume reinvestment of all 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 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 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, 2015
INVESTMENT MANAGER
The First Trust Leveraged Finance Team is comprised of eleven experienced
investment professionals specializing in below investment grade securities. The
team is comprised of portfolio management, research, trading and operations. As
of October 31, 2015, the First Trust Leveraged Finance Team managed or
supervised approximately $1.75 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 stronger for the senior loan
market than for the high-yield bond market with trailing 12-month returns of
0.46% and -2.03% for the S&P/LSTA Leveraged Loan Index and the BofA Merrill
Lynch US High Yield Constrained Index, respectively. For the first time in quite
a while, a healthy dose of volatility was introduced into various markets. The
volatility was initially driven largely by the continued decline in energy
prices and was further fueled by idiosyncratic credit issues across a number of
different industries. For example, headline and regulatory risk drove volatility
that rippled throughout the pharmaceutical and healthcare industries. The
backdrop during this period of volatility was investor fears over global growth
concerns, largely induced by China's slowing growth rate and the potential
impact such a deceleration might have on commodities and the global economy.
Finally, fueling further volatility in the fixed income markets was the
inconsistent rhetoric from the U.S. Federal Reserve (the "Fed") during the
period. Investors have now begun to shift their expectations for the first
interest rate increase to the latter part of 2015 or into 2016. Interest rates
have indeed been volatile this year, as evidenced by the fact that 10-year
Treasury yields opened the period at 2.34%, set an almost two year low on
January 30, 2015 at 1.64%, only to rally to a 12-month high of 2.48% in the
middle of June, to then fall back down to close October at 2.14%.
SENIOR LOAN MARKET
The S&P/LSTA Leveraged Loan Index returned 0.46% for the 12-month period ended
October 31, 2015. Performance throughout the period was mixed with an equal
number of positive and negative monthly returns.
From a credit quality perspective, higher credit rated issues provided the
strongest performance for the period. Higher quality BB rated issues returned
3.10% in the period, significantly outperforming the returns of lower quality B
rated issues at 0.62% and CCC rated issues at -2.12%. The average price of loans
in the market began the period at $97.35, remained relatively unchanged until
peaking at $97.57 at the end of April, and then fell to end the period at
$93.68. (Source: S&P/LCD)
HIGH-YIELD BOND MARKET
The BofA Merrill Lynch US High Yield Constrained Index returned -2.03% for the
12-month period ended October 31, 2015.
Similar to the returns in the senior loan market, higher quality high-yield
bonds outperformed lower quality high-yield bonds in the period. Higher quality
BB rated issues returned 1.18% in the period, significantly outperforming the
returns of lower quality B rated issues at -2.95% and CCC rated issues at
-8.74%. The average price of bonds in the market entered the period at a high of
$102.41 and ended the period at $94.23. (Source: Bloomberg/JPMorgan)
Page 4
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
ANNUAL REPORT
OCTOBER 31, 2015
CREDIT QUALITY/DEFAULT RATES
During the period, the default rate hit a 12-month high of 3.99% in the S&P/LSTA
Leveraged Loan Index in January and 3.06% in the JPMorgan High-Yield Bond
Universe in February. The higher default rate was driven by the increased
volatility in the Oil and Gas and Metals/Mining industries from the continued
decline in energy prices. In addition, it was driven higher by the widely
anticipated default of Texas Competitive Electric Holdings Co. LLC (TXU) in
April of 2014. TXU is the largest senior loan debt issuer to default and a large
high-yield bond issuer. The trailing 12-month default rate in the senior loan
and high-yield bond markets declined sharply in April 2015, when TXU's default
rolled off, and then remained relatively benign, ending the period at 1.32% and
2.21%, respectively, which is well below the long-term average for both asset
classes.
Despite the strength of corporate balance sheets today, the lack of near-term
debt maturities, and access to robust capital markets, we believe the default
rates for both senior loans and high-yield bonds could drift higher in 2016
driven by lower commodity prices. However, we believe that corporate defaults
will be modest and if they do increase, they will likely be contained within
these cyclical commodity sectors and not systemic to the overall market.
FUND PERFORMANCE
The Fund's Class I Share performance since October 31, 2014 was 0.93%,
significantly outperforming the blended index return of -0.77% (comprised of 50%
S&P/LSTA Leveraged Loan Index and 50% BofA Merrill Lynch US High Yield
Constrained Index) over the same time period.
The Fund's monthly distribution payment was increased over the last 12 months to
$0.078 per share from $0.063 per share in October 2014. While current income
remains the primary investment objective, we are also focused on total return
and are pleased with the performance of the Fund, especially in light of recent
volatility. At the end of the period, the effective yield based on this
distribution rate was 4.72% for the Class I Shares.
The primary driver of this outperformance was the Fund's tilt towards senior
loans, and away from high-yield bonds, in a market environment where senior
loans significantly outperformed high-yield bonds. At the end of the period, the
Fund's exposure to senior loans was 57.0% and the Fund's exposure to high-yield
bonds was 43.0%. The allocation to high-yield bonds remains less than the
blended index, but has increased from 36.0% one year ago. We believe having the
ability to tactically exploit relative value opportunities in both the senior
loan and the high-yield bond markets as they arise provides a significant
benefit to the Fund. Another contributing factor behind the Fund's
outperformance was the Fund's significant underweight allocation to the
underperforming Energy sector and the Fund's overweight allocation to the
outperforming Healthcare sector. The Fund was overweight the lowest credit
quality issues. At the end of October, the Fund held 60.8% in issues rated B and
14.5% in issues rated CCC+ or below, including those issues not rated and
privately rated, compared to 41.8% and 11.4% respectively for the blended index.
Although lower rated single B and CCC issues underperformed higher rated BB
issues in the period, the Fund's performance was driven by strong asset
selection within the B and CCC rated categories relative to the blended index.
Detracting from performance during the period was the Fund's underweight
allocation to the Banking industry, which outperformed on the high-yield portion
of the blended index, and the Fund's individual selection within the
Telecommunication Services industry on the senior loan portion.
MARKET AND FUND OUTLOOK
While the turmoil in financial markets caused a great deal of concern recently,
we believe firmly that this is a correction rather than the beginning of a
recession in the U.S. However, we believe during the remainder of the fourth
quarter of 2015, there remains a healthy probability that this correction is not
yet over and we may indeed see further volatility. The last time U.S. equities
declined over 10% (as they did this August) was in 2011. Such a prolonged period
of relative stability can sometimes lead to financial market complacency.
Corrections are largely technical in nature (rather than fundamental) and can
reprice risk, akin to throwing the baby out with the bath water, thereby
creating potential opportunities. As such, we view this current correction as a
healthy opportunity for patient investors willing to wait for fundamentals to
drive returns again. Our outlook for U.S. credit markets including senior bank
loans and high-yield bonds is consistent with our prior outlook. We believe the
combination of strong technical tailwinds created by global central bank policy,
attractive valuations within the credit markets, a below trend default rate
Page 5
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PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
ANNUAL REPORT
OCTOBER 31, 2015
environment, modest but healthy economic growth and sound corporate fundamentals
provide a firm backdrop for potential returns in the periods ahead. We continue
to believe that steadily improving economic data (GDP growth of approximately
2.0%-2.5% and the improved unemployment picture) will provide the Fed the
motivation it requires to begin the process of raising interest rates in the
near term.
We believe today's high-yield bond yields (yield-to-worst) and spreads over U.S.
Treasuries remain attractive at 7.39% and 586 basis points (bps), respectively,
as of October 31, 2015. While weak pricing in energy (oil & gas) and
metals/mining commodities (coal & iron ore) may lead to higher defaults within
the high-yield bond market, we believe those defaults will likely be contained
within those specific sectors, and hence, not necessarily systemic to other
areas of the market. We have maintained a significant underweight position in
energy and metals/mining, which has proven beneficial in the wake of the
commodity price declines. Importantly, energy-induced volatility is likely to
weigh on the high-yield bond benchmark, which we believe further supports the
rationale for active decision making, rather than passive, within the high-yield
credit market.
Retail investors have been reducing exposure to senior loans in the wake of
declining Treasury yields, while institutional investors have simultaneously
embraced senior loans. We believe that with a potential increase in the Federal
Funds rate on the horizon, we'll likely begin to see greater demand for senior
loans in the coming months from retail investors. Based on current valuations,
we believe senior loans, given their senior secured position in the capital
structure and floating interest rate, are well positioned as we move through the
remainder of 2015 and into 2016. We believe the respite in retail demand has
helped to somewhat balance supply and demand within the senior loan market,
given reduced new senior loan issuance that resulted from new regulatory
constraints that have been placed on banks issuing senior loans. Moreover, as
high-yield bond funds suffered redemptions throughout the last few months, we
believe they were selling some of their senior loan positions, given how well
loans held up relative to the broad high-yield market. This supply has also
supported a balanced market, in our opinion.
In summary, we believe that both the high-yield bond and senior loan markets
offer compelling opportunities today, principally within an actively managed
framework where risk can be appropriately managed. As we evaluate new investment
opportunities, decisions will continue to be rooted in our rigorous bottom-up
credit analysis and will focus on the opportunities that we believe offer the
best risk and reward balance. Despite the many distractions that ebb and flow
every quarter, we remain firmly focused on finding value in the high-yield bond
and senior loan markets.
Page 6
FIRST TRUST SHORT DURATION HIGH INCOME FUND
UNDERSTANDING YOUR FUND EXPENSES
OCTOBER 31, 2015 (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, 2015.
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 5/1/2015 - VALUE VALUE 5/1/2015 - EXPENSE
5/1/2015 10/31/2015 10/31/2015 (a) 5/1/2015 10/31/2015 10/31/2015 (a) RATIOS (b)
--------------------------------------------------------------------------------------------------------
Class A $ 1,000.00 $ 982.50 $ 6.25 $ 1,000.00 $ 1,018.90 $ 6.36 1.25%
Class C 1,000.00 979.10 9.98 1,000.00 1,015.12 10.16 2.00
Class I 1,000.00 984.50 5.00 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,
2015 through October 31, 2015), multiplied by 184/365 (to reflect the
six-month period).
(b) These expense ratios reflect expense caps.
Page 7
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2015
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
------------- --------------------------------------------------- ---------- -------------- --------------
SENIOR FLOATING-RATE LOAN INTERESTS - 53.5%
AEROSPACE & DEFENSE - 0.1%
$ 184,462 DynCorp International, Inc., Term Loan............. 6.25% 07/07/16 $ 178,744
--------------
AGRICULTURAL PRODUCTS - 0.4%
677,200 Jimmy Sanders (Pinnacle Operating Corp.), Term B
Loan Refinancing (First Lien)................... 4.75% 11/15/18 668,735
--------------
ALTERNATIVE CARRIERS - 0.1%
245,000 Intelsat (Luxembourg) S.A., Term Loan B-2.......... 3.75% 06/30/19 237,126
--------------
APPAREL RETAIL - 0.5%
395,000 J.C. Penney Corp., Inc., Term Loan................. 5.00% 06/20/19 392,903
490,015 Neiman Marcus Group, Inc., The, Other Term Loan.... 4.25% 10/25/20 478,328
--------------
871,231
--------------
APPLICATION SOFTWARE - 0.6%
199,500 Epicor Software Corp., Term B Loan................. 4.75% 06/01/22 198,153
717,949 Informatica Corp., Dollar Term Loan................ 4.50% 08/05/22 707,775
23,433 Mitchell International, Inc., Initial Term Loan.... 4.50% 10/13/20 23,394
228,575 Triple Point Technologies, Inc., Term Loan (First
Lien)........................................... 5.25% 07/10/20 173,717
--------------
1,103,039
--------------
ASSET MANAGEMENT & CUSTODY BANKS - 0.3%
122,500 Guggenheim Partners Investment Management
Holdings LLC, Initial Term Loan................. 4.25% 07/22/20 122,194
500,000 Hamilton Lane Advisors LLC, Initial Term Loan...... 4.25% 07/08/22 498,440
--------------
620,634
--------------
AUTO PARTS & EQUIPMENT - 0.6%
66,527 Affinia Group, Inc., Tranche B-2 Term Loan......... 4.75% 04/27/20 66,527
372,652 Gates Global LLC, Initial Dollar Term Loan......... 4.25% 07/06/21 349,152
243,125 Remy International, Inc., Term B Loan 2013......... 4.25% 03/05/20 242,517
454,238 Tower Automotive Holdings USA LLC, Initial
Term Loan (2014)................................ 4.00% 04/23/20 448,560
--------------
1,106,756
--------------
BROADCASTING - 1.3%
149,362 Clear Channel Communications, Inc., Tranche D
Term Loan....................................... 6.95% 01/30/19 124,857
1,700,000 Clear Channel Communications, Inc., Tranche E
Term Loan....................................... 7.70% 07/30/19 1,430,431
46,192 Cumulus Media Holdings, Inc., Term Loan............ 4.25% 12/23/20 39,177
362,375 Media General, Inc., Term Loan B................... 4.00% 07/31/20 361,698
487,313 Univision Communications, Inc., 2013 Incremental
Term Loan....................................... 4.00% 03/01/20 483,780
--------------
2,439,943
--------------
CABLE & SATELLITE - 1.0%
253,623 Charter Communications Operating LLC, Bridge
Loan - Unsecured (c) (d)........................ 5.63% 05/26/16 252,038
311,594 Charter Communications Operating LLC, Bridge
Loan - Unsecured 1yr (c) (d).................... 3.75% 05/26/16 309,647
1,250,000 CSC Holdings, Inc. (Neptune Finco Corp.), Initial
Term Loan....................................... 5.00% 10/09/22 1,253,575
--------------
1,815,260
--------------
Page 8 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
------------- --------------------------------------------------- ---------- -------------- --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
CASINOS & GAMING - 4.0%
$ 196,875 Amaya Holdings B.V., 2nd Lien TL................... 8.00% 07/31/22 $ 197,613
2,901,580 Amaya Holdings B.V., Initial Term B Loan
(First Lien).................................... 5.00% 08/01/21 2,829,563
3,304,178 Caesars Growth Partners LLC, Term B Loan (First
Lien)........................................... 6.25% 05/08/21 2,896,674
259,790 CityCenter Holdings LLC, Term B Loan............... 4.25% 10/16/20 259,920
255,371 ROC Finance LLC, Funded Term B Loan................ 5.00% 06/20/19 240,288
929,338 Station Casinos, Inc., B Term Loan................. 4.25% 03/02/20 929,338
--------------
7,353,396
--------------
COAL & CONSUMABLE FUELS - 0.1%
389,455 Arch Coal, Inc., Term Loan......................... 6.25% 05/16/18 200,815
--------------
COMPUTER HARDWARE - 0.2%
306,265 Dell, Inc., Term B-2 Loan.......................... 4.00% 04/29/20 306,093
--------------
CONSUMER FINANCE - 0.6%
166,410 Altisource Solutions S.A.R.L., Term B Loan......... 4.50% 12/09/20 147,481
1,034,226 Walter Investment Management Corp., Tranche B
Term Loan....................................... 4.75% 12/18/20 941,146
--------------
1,088,627
--------------
DATA PROCESSING & OUTSOURCED SERVICES - 0.8%
1,110,938 Interactive Data Corp., Term Loan.................. 4.75% 05/02/21 1,110,471
441,341 Sungard Availability Services Capital, Inc., Term
Loan B.......................................... 6.00% 03/29/19 384,704
--------------
1,495,175
--------------
DIVERSIFIED CHEMICALS - 0.1%
199,000 Ineos US Finance LLC, 2022 Dollar Term Loan........ 4.25% 03/31/22 196,014
--------------
DIVERSIFIED SUPPORT SERVICES - 0.5%
991,694 SMG Holdings, Inc., Term Loan (First Lien)......... 4.50% 02/27/20 985,496
--------------
EDUCATION SERVICES - 0.1%
124,063 Bright Horizons Family Solutions, Inc., Term B-1
Loan............................................ 4.25% 01/30/20 124,218
--------------
ELECTRIC UTILITIES - 0.2%
100,000 TXU (Texas Competitive Electric Holdings Co. LLC),
2014 Term Loan (Non-Extending) (e) (f).......... 4.67% 10/10/14 31,958
750,000 TXU (Texas Competitive Electric Holdings Co. LLC),
2017 Term Loan (Extending) (e) (f).............. 4.67% 10/10/17 253,260
--------------
285,218
--------------
ELECTRONIC EQUIPMENT & INSTRUMENTS - 0.5%
166,667 Linxens LLC, Term Loan B........................... 5.00% 10/17/22 164,445
705,682 Zebra Technologies Corp., Term Loan B.............. 4.75% 10/27/21 709,605
--------------
874,050
--------------
See Notes to Financial Statements Page 9
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
------------- --------------------------------------------------- ---------- -------------- --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
ENVIRONMENTAL & FACILITIES SERVICES - 1.0%
$ 148,875 PSSI (Packers Holdings LLC), Term B Loan........... 5.00% 12/02/21 $ 148,626
941,495 ServiceMaster Co., Initial Term Loan............... 4.25% 07/01/21 940,761
786,000 WTG Holdings III Corp. (EWT Holdings III Corp.),
Term Loan (First Lien).......................... 4.75% 01/15/21 782,070
--------------
1,871,457
--------------
FOOD RETAIL - 1.8%
3,349,799 Albertsons LLC, Term B-4 Loan...................... 5.50% 08/25/21 3,347,890
--------------
HEALTH CARE EQUIPMENT - 1.0%
537,115 Alere, Inc., Term B Loan........................... 4.25% 06/15/22 537,115
658,350 DJO Finance LLC (ReAble Therapeutics Finance
LLC), Initial Term Loan......................... 4.25% 06/08/20 652,425
538,039 Kinetic Concepts, Inc., Dollar Term E-1 Loan....... 4.50% 05/04/18 537,560
--------------
1,727,100
--------------
HEALTH CARE FACILITIES - 1.0%
1,097,250 21st Century Oncology, Inc., Tranche B Term Loan... 6.50% 04/30/22 1,054,732
205,345 Acadia Healthcare Co., Inc., Tranche B Term Loan... 4.25% 02/11/22 205,345
374,063 Concentra, Inc. (MJ Acquisition Corp.), Term
Loan B.......................................... 4.00%-5.25% 06/01/22 372,192
132,328 Kindred Healthcare, Inc., New Term Loan............ 4.25% 04/09/21 131,501
--------------
1,763,770
--------------
HEALTH CARE SERVICES - 2.7%
498,750 Air Medical Group Holdings, Inc., Initial Term
Loan............................................ 4.50% 04/28/22 489,608
748,518 CareCore National LLC, Term Loan................... 5.50% 03/05/21 666,181
149,221 CHG Healthcare Services, Inc., Term Loan (First
Lien)........................................... 4.25% 11/19/19 148,351
995,000 Curo Health Services Holdings, Inc., Term B Loan
(First Lien).................................... 6.50% 02/07/22 992,512
1,320,620 Healogics, Inc. (CDRH Parent, Inc.), Initial Term
Loan (First Lien)............................... 5.25% 07/01/21 1,082,909
375,314 Heartland Dental Care LLC, Incremental Term
Loan............................................ 5.50% 12/21/18 369,684
794,000 Surgery Centers Holdings, Inc., Initial Term Loan
(First Lien).................................... 5.25% 11/03/20 789,371
331,667 Surgical Care Affiliates LLC, Initial Term Loan.... 4.25% 03/17/22 330,632
--------------
4,869,248
--------------
HEALTH CARE SUPPLIES - 0.3%
188,716 Convatec, Inc., TLB................................ 4.25% 06/15/20 187,929
372,243 Sage Products Holdings III LLC, Term Loan B........ 4.25% 12/13/19 371,778
--------------
559,707
--------------
HEALTH CARE TECHNOLOGY - 1.0%
592,500 Connolly Holdings, Inc., Term Loan B............... 4.50% 05/14/21 590,029
248,793 Healthport Technologies LLC (CT Technologies
Intermediate Holdings, Inc.), Initial Term Loan. 5.25% 12/01/21 247,238
1,030,898 Truven Health Analytics, Inc. (VCPH Holding
Corp.), Term Loan B............................. 4.50% 06/06/19 1,008,992
--------------
1,846,259
--------------
Page 10 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
------------- --------------------------------------------------- ---------- -------------- --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
HOMEFURNISHING RETAIL - 0.6%
$ 1,029,966 Serta Simmons Holdings LLC, Term Loan B............ 4.25% 10/01/19 $ 1,029,801
--------------
HOTELS, RESORTS & CRUISE LINES - 0.4%
665,417 Extended Stay America (ESH Hospitality, Inc.),
Term Loan....................................... 5.00% 06/24/19 672,072
--------------
HYPERMARKETS & SUPER CENTERS - 1.8%
482,246 BJ's Wholesale Club, Inc., 2013 (November)
Replacement Loan (Second Lien).................. 8.50% 03/26/20 468,469
2,876,278 BJ's Wholesale Club, Inc., New 2013 (November)
Replacement Loan (First Lien)................... 4.50% 09/26/19 2,847,515
--------------
3,315,984
--------------
INSURANCE BROKERS - 1.5%
319,942 Amwins Group LLC, Term Loan........................ 5.25% 09/06/19 320,502
1,110,921 Confie Seguros Holding II Co., Term B Loan
(First Lien).................................... 5.75% 11/09/18 1,110,921
293,250 Cooper Gay Swett & Crawford Ltd., Term Loan
(First Lien).................................... 5.00% 04/16/20 264,168
1,056,536 HUB International Ltd., Initial Term Loan (New).... 4.00% 10/02/20 1,027,703
97,633 USI, Inc. (Compass Investors, Inc.), Initial Term
Loan............................................ 4.25% 12/27/19 96,320
--------------
2,819,614
--------------
INTEGRATED TELECOMMUNICATION SERVICES - 1.2%
536,154 Numericable U.S. LLC (Altice France S.A.), Dollar
Denominated Tranche B-1 Loan.................... 4.50% 05/21/20 528,717
463,846 Numericable U.S. LLC (Altice France S.A.), Dollar
Denominated Tranche B-2 Loan.................... 4.50% 05/21/20 457,413
1,200,000 Numericable U.S. LLC (Altice France S.A.), Term
Loan B-6........................................ 4.75% 02/10/23 1,185,816
--------------
2,171,946
--------------
LEISURE FACILITIES - 1.5%
1,500,000 ClubCorp Club Operations, Inc., Term B Loan........ 4.25% 07/24/20 1,498,590
537,115 Life Time Fitness, Inc., Closing Date Term Loan.... 4.25% 06/10/22 532,974
656,671 Planet Fitness Holdings LLC, Term Loan............. 4.75% 03/31/21 655,850
--------------
2,687,414
--------------
LIFE SCIENCES TOOLS & SERVICES - 2.9%
635,302 Immucor, Inc., Term B-2 Loan....................... 5.00% 08/19/18 621,534
2,350,317 InVentiv Health, Inc., Term B-4 Loan............... 7.75% 05/15/18 2,337,109
790,000 Millennium Laboratories LLC, Tranche B Term
Loan............................................ 5.25% 04/16/21 278,475
1,069,792 Ortho-Clinical Diagnostics, Inc., Initial Term
Loan............................................ 4.75% 06/30/21 1,052,857
648,375 Pharmaceutical Product Development, Inc., Initial
Term Loan....................................... 4.25% 08/18/22 638,299
400,000 Sterigenics International (STHI Intermediate
Holding Corp.), Initial Term Loan............... 4.25% 05/16/22 395,500
--------------
5,323,774
--------------
See Notes to Financial Statements Page 11
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
------------- --------------------------------------------------- ---------- -------------- --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
METAL & GLASS CONTAINERS - 0.6%
$ 96,344 Anchor Glass Container Corp., Term B Loan.......... 4.50% 06/30/22 $ 96,206
246,250 Ardagh Holdings USA, Inc. (Ardagh Packaging
Finance S.A.), New Term Loan.................... 4.00% 12/17/19 245,790
609,231 Berlin Packaging LLC, Initial Term Loan............ 4.50% 10/01/21 607,897
157,105 PODS, Inc. (APLPD Bidco LLC), Term Loan B.......... 4.50% 02/02/22 156,123
--------------
1,106,016
--------------
MOVIES & ENTERTAINMENT - 1.7%
397,000 Creative Artists Agency LLC (CAA Holdings LLC),
Initial Term Loan............................... 5.50% 12/17/21 397,123
2,494,987 Formula One (Delta 2 Lux S.A.R.L.), Facility B3
(USD)........................................... 4.75% 07/30/21 2,444,040
245,911 WME IMG Worldwide, Inc., Term Loan (First
Lien)........................................... 5.25% 05/06/21 245,219
--------------
3,086,382
--------------
OIL & GAS EXPLORATION & PRODUCTION - 0.1%
400,000 American Energy Marcellus Holdings LLC, Initial
Loan (First Lien)............................... 5.25% 08/04/20 184,800
472,222 American Energy Marcellus Holdings LLC, Initial
Loan (Second Lien).............................. 8.50% 08/04/21 34,628
--------------
219,428
--------------
OTHER DIVERSIFIED FINANCIAL SERVICES - 1.1%
2,000,000 First Data Corp., 2021 New Dollar Term Loan........ 4.20% 03/24/21 2,000,000
--------------
PACKAGED FOODS & MEATS - 3.1%
266,667 B&G Foods, Inc., Term Loan B....................... 3.75% 11/02/22 266,584
1,180,118 Ferrara Candy Co. (Candy Intermediate Holdings,
Inc.), Initial Term Loan........................ 7.50% 06/18/18 1,165,367
2,857,143 New HB Acquisition LLC, Term B Loan (First
Lien)........................................... 4.50% 08/03/22 2,859,800
1,308,377 New HB Acquisition LLC, Term B Loan (Second
Lien)........................................... 8.50% 08/03/23 1,303,470
--------------
5,595,221
--------------
PAPER PACKAGING - 0.1%
118,705 Exopack Holding Corp., Term Loan B................. 4.50% 05/08/19 118,310
--------------
PHARMACEUTICALS - 3.1%
410,625 Akorn, Inc., Loan.................................. 5.50% 04/16/21 406,519
125,000 AMAG Pharmaceuticals, Inc., Initial Term Loan...... 4.75% 08/17/21 122,500
1,287,166 Amneal Pharmaceuticals LLC, Term Loan B............ 4.50% 11/01/19 1,271,720
1,316,669 Catalent Pharma Solutions, Inc., Dollar Term
Loan............................................ 4.25% 05/20/21 1,313,219
666,667 Concordia Healthcare Corp., Term Loan B............ 5.25% 10/21/21 639,447
250,000 Endo Pharmaceuticals Holdings, Inc., Term Loan B... 3.75% 06/27/22 245,430
592,500 Patheon, Inc. (JLL/Delta Dutch Newco B.V.), Initial
Dollar Term Loan................................ 4.25% 03/11/21 579,909
1,096,250 Valeant Pharmaceuticals International, Inc.,
Series F-1 Tranche B Term Loan.................. 4.00% 04/01/22 1,017,594
--------------
5,596,338
--------------
Page 12 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
------------- --------------------------------------------------- ---------- -------------- --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
PROPERTY & CASUALTY INSURANCE - 0.5%
$ 573,174 Cunningham Lindsey U.S., Inc., Initial Term Loan
(First Lien) (c)................................ 5.00% 12/10/19 $ 435,612
600,000 Sedgwick Claims Management Services, Inc., Initial
Loan (Second Lien).............................. 6.75% 02/28/22 559,128
--------------
994,740
--------------
PUBLISHING - 0.8%
336,694 Cengage Learning Acquisitions, Inc., Term Loan..... 7.00% 03/31/20 334,253
1,231,250 Mergermarket USA, Inc., 2014 Incremental Term
Loan............................................ 4.50% 02/04/21 1,198,930
--------------
1,533,183
--------------
REAL ESTATE SERVICES - 0.7%
1,296,750 DTZ Worldwide Ltd., 2015-1 Additional Term
Loan............................................ 4.25% 11/04/21 1,282,979
--------------
RESEARCH & CONSULTING SERVICES - 1.6%
1,514,738 Acosta, Inc., Term Loan B.......................... 4.25% 09/26/21 1,476,112
1,139,816 Advantage Sales & Marketing, Inc., Initial Term
Loan (First Lien)............................... 4.25% 07/23/21 1,113,555
408,387 Information Resources, Inc., Term Loan............. 4.75% 09/30/20 409,069
--------------
2,998,736
--------------
RESTAURANTS - 2.1%
50,000 Focus Brands, Inc., Term Loan (Second Lien)........ 10.25% 08/21/18 49,750
1,000,000 Portillo's Holdings LLC, Second Lien Term Loan..... 8.00% 08/15/22 955,000
2,375,088 Portillo's Holdings LLC, Term B Loan (First
Lien)........................................... 4.75% 08/02/21 2,345,399
424,286 Red Lobster Management LLC, Initial Term Loan...... 6.25% 07/28/21 422,873
--------------
3,773,022
--------------
RETAIL REITS - 0.1%
200,000 Capital Automotive LLC, Term Loan (Second
Lien)........................................... 6.00% 04/30/20 200,834
--------------
SEMICONDUCTORS - 0.5%
735,033 Freescale Semiconductor, Inc., Tranche B-4 Term
Loan............................................ 4.25% 02/28/20 734,180
235,200 Freescale Semiconductor, Inc., Tranche B5 Term
Loan............................................ 5.00% 01/15/21 235,094
--------------
969,274
--------------
SPECIALIZED CONSUMER SERVICES - 1.4%
1,222,183 Asurion LLC, Incremental Tranche B-1 Term Loan..... 5.00% 05/24/19 1,164,129
907,320 Asurion LLC, Incremental Tranche B-4 Term Loan..... 5.00% 08/04/22 856,284
602,941 Asurion LLC, Term Loan (Second Lien)............... 8.50% 03/03/21 541,393
--------------
2,561,806
--------------
SPECIALIZED FINANCE - 0.7%
400,000 AlixPartners LLP, Initial Term Loan................ 4.50% 07/28/22 399,584
898,410 Duff & Phelps Corp., Initial Term Loan............. 4.75% 04/23/20 887,926
--------------
1,287,510
--------------
See Notes to Financial Statements Page 13
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
------------- --------------------------------------------------- ---------- -------------- --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
SPECIALIZED REITS - 0.4%
$ 698,250 Communication Sales & Leasing, Inc., Term Loan..... 5.00% 10/24/22 $ 658,101
--------------
SPECIALTY CHEMICALS - 0.5%
61,009 A.I. Chem (Allnex (Luxembourg) & Cy S.C.A.),
Tranche B-1 Term Loan........................... 4.50% 10/03/19 60,933
31,655 A.I. Chem (Allnex (Luxembourg) & Cy S.C.A.),
Tranche B-2 Term Loan........................... 4.50% 10/03/19 31,615
396,000 Emerald Performance Materials LLC, Initial Term
Loan (First Lien)............................... 4.50% 07/30/21 392,785
205,843 NuSil Technology LLC, Term Loan.................... 5.25% 04/07/17 204,093
110,278 Platform Specialty Products Corp. (fka: Macdermid,
Inc.), Tranche B-2 Term Loan.................... 4.75% 06/07/20 106,418
99,750 Trinseo Materials Operating S.C.A., Term Loan B.... 4.25% 11/05/21 98,952
--------------
894,796
--------------
SPECIALTY STORES - 1.3%
250,000 Party City Holdings, Inc., Term Loan............... 4.25% 08/19/22 249,875
1,005,715 PetSmart, Inc., Tranche B-1 Loan................... 4.25% 03/11/22 1,005,172
223,214 Toys "R" US-Delaware, Inc., Canadian FILO TL....... 8.25% 10/24/19 222,377
276,786 Toys "R" US-Delaware, Inc., FILO Term Loan......... 8.25% 10/24/19 275,748
276,583 Toys "R" US-Delaware, Inc., Term B-2 Loan.......... 5.25% 05/25/18 221,266
508,075 Toys "R" US-Delaware, Inc., Term B4 Loan........... 9.75% 04/25/20 443,509
--------------
2,417,947
--------------
SYSTEMS SOFTWARE - 1.8%
184,769 Applied Systems, Inc., Initial Term Loan (First
Lien)........................................... 4.25% 01/25/21 183,209
220,564 Applied Systems, Inc., Initial Term Loan (Second
Lien)........................................... 7.50% 01/24/22 212,017
100,000 Blue Coat Systems, Inc., Initial Term Loan......... 4.50% 05/20/22 99,208
2,242,465 BMC Software Finance, Inc., Initial US Term Loan... 5.00% 09/10/20 2,016,111
721,875 Compuware Corp., Term Loan B....................... 6.25% 12/31/19 687,889
--------------
3,198,434
--------------
TRUCKING - 0.6%
47,872 Kenan Advantage Group, Inc., Delayed Draw Term 1
Loan (g)........................................ 1.50% (h) 07/31/22 47,678
109,338 Kenan Advantage Group, Inc., Term Loan B-2......... 4.00% 07/31/22 108,894
342,790 Kenan Advantage Group, Inc., Term Loan B1.......... 4.00% 07/31/22 341,398
333,333 Navistar, Inc., Term Loan B........................ 6.50% 08/06/20 313,333
142,369 SIRVA Worldwide, Inc., Loan........................ 7.50% 03/27/19 135,962
--------------
947,265
--------------
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 76,823
--------------
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS........................................ 97,473,751
(Cost $101,736,655) --------------
Page 14 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- --------------------------------------------------- ---------- -------------- --------------
CORPORATE BONDS AND NOTES - 31.4%
AEROSPACE & DEFENSE - 0.8%
$ 100,000 Aerojet Rocketdyne Holdings, Inc................... 7.13% 03/15/21 $ 105,625
1,500,000 DigitalGlobe, Inc. (i)............................. 5.25% 02/01/21 1,356,870
--------------
1,462,495
--------------
AGRICULTURAL PRODUCTS - 0.3%
455,000 Darling Ingredients, Inc........................... 5.38% 01/15/22 453,294
125,000 Pinnacle Operating Corp. (i)....................... 9.00% 11/15/20 121,562
--------------
574,856
--------------
ALTERNATIVE CARRIERS - 2.0%
600,000 Level 3 Communications, Inc........................ 5.75% 12/01/22 616,500
1,500,000 Level 3 Financing, Inc............................. 5.38% 08/15/22 1,531,875
1,500,000 Level 3 Financing, Inc. (i)........................ 5.13% 05/01/23 1,518,750
--------------
3,667,125
--------------
APPLICATION SOFTWARE - 0.6%
62,000 Audatex North America, Inc. (i).................... 6.00% 06/15/21 62,667
63,000 Audatex North America, Inc. (i).................... 6.13% 11/01/23 63,630
1,000,000 Infor US, Inc. (i)................................. 6.50% 05/15/22 950,000
--------------
1,076,297
--------------
AUTO PARTS & EQUIPMENT - 0.3%
250,000 American Axle & Manufacturing, Inc................. 6.25% 03/15/21 262,813
250,000 MPG Holdco I, Inc.................................. 7.38% 10/15/22 266,875
--------------
529,688
--------------
BROADCASTING - 1.9%
1,000,000 Gray Television, Inc............................... 7.50% 10/01/20 1,047,450
375,000 LIN Television Corp. (i)........................... 5.88% 11/15/22 378,750
188,000 Nexstar Broadcasting, Inc.......................... 6.88% 11/15/20 195,050
100,000 Nexstar Broadcasting, Inc. (i)..................... 6.13% 02/15/22 100,250
250,000 Sinclair Television Group, Inc..................... 6.38% 11/01/21 258,750
500,000 Sinclair Television Group, Inc..................... 6.13% 10/01/22 516,250
1,000,000 Sinclair Television Group, Inc. (i)................ 5.63% 08/01/24 983,750
--------------
3,480,250
--------------
BUILDING PRODUCTS - 0.3%
125,000 American Builders & Contractors Supply Co.,
Inc. (i)........................................ 5.63% 04/15/21 129,063
500,000 Hillman Group (The), Inc. (i)...................... 6.38% 07/15/22 468,750
--------------
597,813
--------------
CABLE & SATELLITE - 2.9%
3,250,000 CCO Holdings LLC/CCO Holdings Capital Corp......... 5.75% 01/15/24 3,306,875
1,000,000 Cequel Communications Holdings I LLC/Cequel
Capital Corp. (i)............................... 5.13% 12/15/21 964,490
1,000,000 Dish DBS Corp...................................... 5.88% 11/15/24 959,000
--------------
5,230,365
--------------
CASINOS & GAMING - 1.8%
550,000 Caesars Growth Properties Holdings LLC/Caesars
Growth Properties Finance, Inc.................. 9.38% 05/01/22 457,875
See Notes to Financial Statements Page 15
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- --------------------------------------------------- ---------- -------------- --------------
CORPORATE BONDS AND NOTES (CONTINUED)
CASINOS & GAMING (CONTINUED)
$ 50,000 MGM Resorts International.......................... 8.63% 02/01/19 $ 56,750
1,850,000 MGM Resorts International.......................... 7.75% 03/15/22 2,060,437
600,000 Station Casinos LLC................................ 7.50% 03/01/21 643,500
--------------
3,218,562
--------------
COMPUTER & ELECTRONICS RETAIL - 0.1%
100,000 Energizer Holdings, Inc. (i)....................... 5.50% 06/15/25 102,250
--------------
CONSTRUCTION MACHINERY & HEAVY TRUCKS - 0.0%
50,000 Oshkosh Corp....................................... 5.38% 03/01/22 51,375
--------------
DIVERSIFIED REAL ESTATE ACTIVITIES - 0.8%
500,000 Meritage Homes Corp................................ 7.00% 04/01/22 550,000
1,000,000 TRI Pointe Holdings, Inc........................... 5.88% 06/15/24 1,005,000
--------------
1,555,000
--------------
FOOD DISTRIBUTORS - 0.2%
312,000 KeHE Distributors LLC/KeHE Finance Corp. (i)....... 7.63% 08/15/21 329,940
--------------
HEALTH CARE EQUIPMENT - 2.6%
333,000 Alere, Inc......................................... 6.50% 06/15/20 345,487
2,050,000 DJO Finco, Inc./DJO Finance LLC/DJO Finance
Corp. (i)....................................... 8.13% 06/15/21 2,039,750
300,000 Hill-Rom Holdings, Inc. (i)........................ 5.75% 09/01/23 307,500
400,000 Kinetic Concepts, Inc./KCI USA, Inc................ 10.50% 11/01/18 423,360
1,500,000 Kinetic Concepts, Inc./KCI USA, Inc................ 12.50% 11/01/19 1,595,625
--------------
4,711,722
--------------
HEALTH CARE FACILITIES - 4.8%
1,100,000 CHS/Community Health Systems, Inc.................. 6.88% 02/01/22 1,113,750
300,000 HealthSouth Corp................................... 5.75% 11/01/24 301,500
300,000 HealthSouth Corp. (i).............................. 5.75% 11/01/24 301,500
1,250,000 Kindred Healthcare, Inc. (i)....................... 8.00% 01/15/20 1,306,250
500,000 Kindred Healthcare, Inc............................ 6.38% 04/15/22 474,375
250,000 LifePoint Health, Inc.............................. 5.50% 12/01/21 254,375
1,500,000 Select Medical Corp................................ 6.38% 06/01/21 1,335,000
500,000 Tenet Healthcare Corp.............................. 8.13% 04/01/22 531,250
3,000,000 Tenet Healthcare Corp.............................. 6.75% 06/15/23 2,992,500
250,000 Vantage Oncology LLC/Vantage Oncology
Finance Co. (i)................................. 9.50% 06/15/17 226,250
--------------
8,836,750
--------------
HEALTH CARE SERVICES - 0.6%
600,000 Amsurg Corp........................................ 5.63% 07/15/22 591,750
510,000 Surgical Care Affiliates, Inc. (i)................. 6.00% 04/01/23 515,100
--------------
1,106,850
--------------
HOTELS, RESORTS & CRUISE LINES - 0.5%
850,000 FelCor Lodging L.P................................. 6.00% 06/01/25 884,000
--------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS - 0.6%
650,000 Dynegy, Inc........................................ 7.63% 11/01/24 654,875
500,000 NRG Energy, Inc.................................... 6.25% 07/15/22 462,500
--------------
1,117,375
--------------
Page 16 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- --------------------------------------------------- ---------- -------------- --------------
CORPORATE BONDS AND NOTES (CONTINUED)
INTEGRATED TELECOMMUNICATION SERVICES - 0.6%
$ 125,000 Frontier Communications Corp. (i).................. 8.88% 09/15/20 $ 130,077
110,000 Frontier Communications Corp....................... 6.25% 09/15/21 98,780
250,000 Frontier Communications Corp....................... 8.75% 04/15/22 241,875
250,000 Frontier Communications Corp. (i).................. 10.50% 09/15/22 260,000
500,000 Windstream Services LLC............................ 7.75% 10/15/20 451,875
--------------
1,182,607
--------------
LEISURE FACILITIES - 0.7%
1,200,000 Six Flags Entertainment Corp. (i).................. 5.25% 01/15/21 1,251,000
--------------
LIFE SCIENCES TOOLS & SERVICES - 2.0%
1,500,000 Crimson Merger Sub, Inc. (i)....................... 6.63% 05/15/22 1,303,125
1,000,000 Immucor, Inc....................................... 11.13% 08/15/19 1,030,000
500,000 inVentiv Health, Inc............................... 10.00% 08/15/18 487,500
900,000 Jaguar Holding Co. II/Pharmaceutical Product
Development LLC (i)............................. 6.38% 08/01/23 903,375
--------------
3,724,000
--------------
METAL & GLASS CONTAINERS - 0.1%
100,000 Owens-Brockway Glass Container, Inc. (i)........... 5.88% 08/15/23 106,313
--------------
MOVIES & ENTERTAINMENT - 0.1%
125,000 Cinemark USA, Inc.................................. 4.88% 06/01/23 123,750
--------------
OIL & GAS EXPLORATION & PRODUCTION - 0.2%
500,000 American Energy-Permian Basin LLC/AEPB Finance
Corp. (i)....................................... 7.13% 11/01/20 271,250
125,000 Sanchez Energy Corp................................ 6.13% 01/15/23 91,250
--------------
362,500
--------------
OIL & GAS REFINING & MARKETING - 0.2%
250,000 CITGO Petroleum Corp. (i).......................... 6.25% 08/15/22 246,250
62,500 Murphy Oil USA, Inc................................ 6.00% 08/15/23 66,250
--------------
312,500
--------------
OIL & GAS STORAGE & TRANSPORTATION - 0.4%
575,000 Crestwood Midstream Partners L.P./Crestwood
Midstream Finance Corp.......................... 6.13% 03/01/22 497,375
188,000 Summit Midstream Holdings LLC/Summit
Midstream Finance Corp.......................... 5.50% 08/15/22 164,500
--------------
661,875
--------------
PACKAGED FOODS & MEATS - 1.3%
692,000 JBS USA LLC/JBS USA Finance, Inc. (i).............. 5.88% 07/15/24 679,890
500,000 JBS USA LLC/JBS USA Finance, Inc. (i).............. 5.75% 06/15/25 486,250
150,000 Pilgrim's Pride Corp. (i).......................... 5.75% 03/15/25 153,750
1,000,000 Post Holdings, Inc................................. 7.38% 02/15/22 1,057,350
100,000 Post Holdings, Inc. (i)............................ 7.75% 03/15/24 106,750
--------------
2,483,990
--------------
RESEARCH & CONSULTING SERVICES - 0.1%
125,000 Nielsen Finance LLC/Nielsen Finance Co. (i)........ 5.00% 04/15/22 127,500
--------------
See Notes to Financial Statements Page 17
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- --------------------------------------------------- ---------- -------------- --------------
CORPORATE BONDS AND NOTES (CONTINUED)
RESTAURANTS - 0.2%
$ 300,000 Seminole Hard Rock Entertainment, Inc./Seminole
Hard Rock International LLC (i)................. 5.88% 05/15/21 $ 300,750
--------------
SPECIALIZED REITS - 0.8%
375,000 DuPont Fabros Technology L.P....................... 5.88% 09/15/21 395,625
250,000 DuPont Fabros Technology L.P....................... 5.63% 06/15/23 257,500
500,000 Geo Group (The), Inc............................... 5.88% 01/15/22 510,625
250,000 Geo Group (The), Inc............................... 5.88% 10/15/24 253,750
--------------
1,417,500
--------------
SPECIALTY CHEMICALS - 0.4%
900,000 Hexion, Inc........................................ 6.63% 04/15/20 767,250
--------------
SPECIALTY STORES - 0.5%
675,000 Argos Merger Sub, Inc. (i)......................... 7.13% 03/15/23 712,125
125,000 Dollar Tree, Inc. (i).............................. 5.25% 03/01/20 130,937
125,000 Dollar Tree, Inc. (i).............................. 5.75% 03/01/23 132,344
--------------
975,406
--------------
SYSTEMS SOFTWARE - 0.4%
375,000 BMC Software Finance, Inc. (i)..................... 8.13% 07/15/21 291,563
500,000 BMC Software, Inc.................................. 7.25% 06/01/18 441,875
--------------
733,438
--------------
TRADING COMPANIES & DISTRIBUTORS - 0.3%
600,000 BlueLine Rental Finance Corp. (i).................. 7.00% 02/01/19 608,250
--------------
TRUCKING - 0.4%
600,000 Avis Budget Car Rental LLC/Avis Budget Finance,
Inc. (i)........................................ 5.13% 06/01/22 614,694
125,000 Avis Budget Car Rental LLC/Avis Budget Finance,
Inc............................................. 5.50% 04/01/23 130,000
--------------
744,694
--------------
WIRELESS TELECOMMUNICATION SERVICES - 1.6%
500,000 Sprint Communications, Inc......................... 7.00% 08/15/20 465,000
1,350,000 Sprint Corp........................................ 7.25% 09/15/21 1,243,687
750,000 T-Mobile USA, Inc.................................. 6.73% 04/28/22 776,250
200,000 T-Mobile USA, Inc.................................. 6.00% 03/01/23 199,875
200,000 T-Mobile USA, Inc.................................. 6.63% 04/01/23 204,812
--------------
2,889,624
--------------
TOTAL CORPORATE BONDS AND NOTES.................................................. 57,305,660
(Cost $58,730,625) --------------
FOREIGN CORPORATE BONDS AND NOTES - 8.9%
AEROSPACE & DEFENSE - 0.6%
250,000 Bombardier, Inc. (i)............................... 5.50% 09/15/18 235,625
750,000 Bombardier, Inc. (i)............................... 7.75% 03/15/20 658,125
333,000 Bombardier, Inc. (i)............................... 6.00% 10/15/22 258,075
--------------
1,151,825
--------------
ALTERNATIVE CARRIERS - 0.6%
1,750,000 Intelsat Luxembourg S.A............................ 7.75% 06/01/21 1,041,250
--------------
Page 18 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- --------------------------------------------------- ---------- -------------- --------------
FOREIGN CORPORATE BONDS AND NOTES (CONTINUED)
AUTOMOBILE MANUFACTURERS - 0.3%
$ 500,000 Fiat Chrysler Automobiles N.V...................... 5.25% 04/15/23 $ 500,000
--------------
BUILDING PRODUCTS - 0.6%
1,020,000 Cemex S.A.B. de C.V. (i)........................... 7.25% 01/15/21 1,048,050
--------------
CABLE & SATELLITE - 0.3%
500,000 Virgin Media Finance PLC (i)....................... 6.00% 10/15/24 505,625
--------------
CASINOS & GAMING - 0.3%
250,000 MCE Finance Ltd. (i)............................... 5.00% 02/15/21 235,325
310,000 Wynn Macau Ltd. (i)................................ 5.25% 10/15/21 285,200
--------------
520,525
--------------
DIVERSIFIED CHEMICALS - 0.4%
700,000 INEOS Group Holdings S.A. (i)...................... 6.13% 08/15/18 707,875
--------------
INTEGRATED TELECOMMUNICATION SERVICES - 0.3%
500,000 Numericable-SFR SAS (i)............................ 6.00% 05/15/22 502,500
--------------
METAL & GLASS CONTAINERS - 0.5%
62,000 Ardagh Packaging Finance PLC/Ardagh Holdings
USA, Inc. (i)................................... 6.25% 01/31/19 63,008
114,706 Ardagh Packaging Finance PLC/Ardagh Holdings
USA, Inc. (i)................................... 7.00% 11/15/20 115,566
750,000 Ardagh Packaging Finance PLC/Ardagh Holdings
USA, Inc. (i)................................... 6.75% 01/31/21 772,500
--------------
951,074
--------------
PHARMACEUTICALS - 3.5%
1,200,000 Capsugel S.A. (i) (j).............................. 7.00% 05/15/19 1,211,250
1,420,000 Endo Ltd./Endo Finance LLC/Endo Finco, Inc. (i).... 6.00% 07/15/23 1,427,100
115,000 Endo Ltd./Endo Finance LLC/Endo Finco, Inc. (i).... 6.00% 02/01/25 114,713
1,000,000 Mallinckrodt International Finance S.A./
Mallinckrodt CB LLC (i)......................... 5.75% 08/01/22 955,620
250,000 Mallinckrodt International Finance S.A./
Mallinckrodt CB LLC (i)......................... 5.63% 10/15/23 237,187
250,000 Mallinckrodt International Finance S.A./
Mallinckrodt CB LLC (i)......................... 5.50% 04/15/25 228,673
1,000,000 Valeant Pharmaceuticals International, Inc. (i).... 5.38% 03/15/20 875,000
1,700,000 Valeant Pharmaceuticals International, Inc. (i).... 5.88% 05/15/23 1,439,687
--------------
6,489,230
--------------
RESEARCH & CONSULTING SERVICES - 0.5%
825,000 Nielsen Co. Luxembourg S.A.R.L. (The) (i).......... 5.50% 10/01/21 858,000
--------------
RESTAURANTS - 0.6%
1,150,000 1011778 BC ULC/New Red Finance, Inc. (i)........... 6.00% 04/01/22 1,206,062
--------------
SECURITY & ALARM SERVICES - 0.4%
750,000 Garda World Security Corp. (i)..................... 7.25% 11/15/21 688,125
--------------
TOTAL FOREIGN CORPORATE BONDS AND NOTES.......................................... 16,170,141
(Cost $17,597,377) --------------
TOTAL INVESTMENTS - 93.8%........................................................ 170,949,552
(Cost $178,064,657) (k)
NET OTHER ASSETS AND LIABILITIES - 6.2%.......................................... 11,350,992
--------------
NET ASSETS - 100.0%.............................................................. $ 182,300,544
==============
See Notes to Financial Statements Page 19
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
-----------------------------
(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, 2015. 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) Pursuant to procedures adopted by First Trust Series Fund's (the "Trust")
Board of Trustees, this security has been determined to be illiquid by
First Trust Advisors L.P. ("First Trust" or the "Advisor"), the Fund's
advisor.
(d) This security is fair valued by the Advisor's Pricing Committee in
accordance with procedures adopted by the Trust's Board of Trustees and in
accordance with provisions of the Investment Company Act of 1940, as
amended. At October 31, 2015, securities noted as such are valued at
$561,685 or 0.31% of net assets.
(e) This issuer has filed for protection in federal bankruptcy court.
(f) This issuer is in default but interest is still being accrued by the Fund
and paid by the issuer.
(g) Delayed Draw Loan (all or a portion of which is unfunded). See Note 2C -
Unfunded Loan Commitments in the Notes to Financial Statements.
(h) Represents commitment fee rate on unfunded loan commitment.
(i) 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. 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, 2015,
securities noted as such amounted to $35,672,156 or 19.57% of net assets.
(j) 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 7.00% 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. For the year ended October 31, 2015, this
security paid all of its interest in cash.
(k) Aggregate cost for federal income tax purposes is $178,416,607. As of
October 31, 2015, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$924,146 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$8,391,201.
Page 20 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of October 31,
2015 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 10/31/2015 PRICES INPUTS INPUTS
--------------------------------------------------- ------------- ------------- ------------- -------------
Senior Floating-Rate Loan Interests:
Cable & Satellite............................... $ 1,815,260 $ -- $ 1,253,575 $ 561,685
Property & Casualty Insurance................... 994,740 -- 559,128 435,612
Other Industry Categories*...................... 94,663,751 -- 94,663,751 --
Corporate Bonds and Notes*......................... 57,305,660 -- 57,305,660 --
Foreign Corporate Bonds and Notes*................. 16,170,141 -- 16,170,141 --
------------- ------------- ------------- -------------
Total Investments.................................. $ 170,949,552 $ -- $ 169,952,255 $ 997,297
============= ============= ============= =============
* See Portfolio of Investments for industry breakout.
There were no transfers between Level 1 and Level 2.
All transfers in and out of Level 3 during the period are assumed to be
transferred on the last day of the period at their current value. As of October
31, 2015, the Fund transferred Senior Floating-Rate Loan Interests valued at
$435,612 from Level 2 to Level 3 of the fair value hierarchy. The Senior
Floating-Rate Loan Interests that transferred from Level 2 to Level 3 did so
primarily as a result of a change in information obtained from an independent
third-party pricing service relating to the market activity of individual Senior
Floating-Rate Loan Interests and a lack of trading activity in certain Senior
Floating-Rate Loan Interests.
Level 3 Senior Floating-Rate Loan Interests that are fair valued by the
Advisor's Pricing Committee are footnoted in the Portfolio of Investments. Level
3 Senior Floating-Rate Loan Interests are valued based on either third-party
pricing service prices obtained from dealer runs and indicative sheets from
brokers or are valued using broker quotes. The values are based on unobservable
and non-quantitative inputs. The Trust's Board of Trustees has adopted valuation
procedures that are utilized by the Advisor's Pricing Committee to oversee
day-to-day valuation of the Fund's investments. The Advisor's Pricing Committee,
through the Fund's fund accounting agent, monitors daily pricing via tolerance
checks and stale and unchanged price reviews. The Advisor's Pricing Committee
also reviews monthly back testing of pricing service prices by comparing sales
prices of the Fund investments to prior day pricing service prices.
Additionally, the Advisor's Pricing Committee reviews periodic information from
the Fund's third-party pricing service that compares secondary market trade
prices to their daily valuations.
The following table presents the activity of the Fund's investments measured at
fair value on a recurring basis using significant unobservable inputs (Level 3)
for the period presented.
BEGINNING BALANCE AT OCTOBER 31, 2014
Senior Floating-Rate Loan Interests $ --
Net Realized Gain (Loss) --
Net Change in Unrealized Appreciation/Depreciation --
Purchases 561,685
Sales --
Transfers In 435,612
Transfers Out --
-------------
ENDING BALANCE AT OCTOBER 31, 2015
Senior Floating-Rate Loan Interests 997,297
-------------
Total Level 3 holdings $ 997,297
=============
There was no net change in unrealized appreciation (depreciation) from Level 3
investments held as of October 31, 2015.
See Notes to Financial Statements Page 21
FIRST TRUST SHORT DURATION HIGH INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2015
ASSETS:
Investments, at value
(Cost $178,064,657)......................................................................... $170,949,552
Cash........................................................................................... 12,066,448
Receivables:
Interest.................................................................................... 1,911,043
Investment securities sold.................................................................. 1,594,230
Fund shares sold............................................................................ 1,019,614
------------
Total Assets................................................................................ 187,540,887
------------
LIABILITIES:
Payables:
Investment securities purchased............................................................. 4,448,715
Fund shares repurchased..................................................................... 361,305
Investment advisory fees.................................................................... 95,900
Distributions payable....................................................................... 89,898
Audit and tax fees.......................................................................... 58,200
Administrative fees......................................................................... 49,936
Unfunded loan commitments................................................................... 47,633
12b-1 distribution and service fees......................................................... 32,451
Transfer agent fees......................................................................... 17,440
Printing fees............................................................................... 16,290
Custodian fees.............................................................................. 8,592
Registration fees........................................................................... 4,529
Commitment fees............................................................................. 1,988
Trustees' fees and expenses................................................................. 1,488
Legal fees.................................................................................. 1,471
Financial reporting fees.................................................................... 771
Other liabilities.............................................................................. 3,736
------------
Total Liabilities........................................................................... 5,240,343
------------
NET ASSETS..................................................................................... $182,300,544
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $188,717,045
Par value...................................................................................... 91,934
Accumulated net investment income (loss)....................................................... 815,397
Accumulated net realized gain (loss) on investments............................................ (208,727)
Net unrealized appreciation (depreciation) on investments...................................... (7,115,105)
------------
NET ASSETS..................................................................................... $182,300,544
============
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 $53,432,464 and
2,694,326 shares of beneficial interest issued and outstanding)........................... $ 19.83
Maximum sales charge (3.50% of offering price).............................................. 0.72
------------
Maximum offering price to public............................................................ $ 20.55
============
CLASS C SHARES:
Net asset value and redemption price per share (Based on net assets of $25,212,683 and
1,272,424 shares of beneficial interest issued and outstanding)........................... $ 19.81
============
CLASS I SHARES:
Net asset value and redemption price per share (Based on net assets of $103,655,397 and
5,226,641 shares of beneficial interest issued and outstanding)........................... $ 19.83
============
Page 22 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2015
INVESTMENT INCOME:
Interest....................................................................................... $ 9,435,594
Other.......................................................................................... 109,380
-------------
Total investment income..................................................................... 9,544,974
-------------
EXPENSES:
Investment advisory fees....................................................................... 1,091,519
12b-1 distribution and/or service fees
Class A..................................................................................... 114,096
Class C..................................................................................... 247,322
Transfer agent fees............................................................................ 131,408
Administrative fees............................................................................ 125,239
Registration fees.............................................................................. 71,568
Audit and tax fees............................................................................. 59,790
Legal fees..................................................................................... 58,867
Printing fees.................................................................................. 41,949
Custodian fees................................................................................. 36,922
Commitment fees................................................................................ 21,109
Trustees' fees and expenses.................................................................... 17,945
Financial reporting fees....................................................................... 9,250
Other.......................................................................................... 25,789
-------------
Total expenses.............................................................................. 2,052,773
Fees waived or expenses reimbursed by the investment advisor................................ (11,894)
-------------
Net expenses................................................................................... 2,040,879
-------------
NET INVESTMENT INCOME (LOSS)................................................................... 7,504,095
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments..................................................... (166,375)
Net change in unrealized appreciation (depreciation) on investments......................... (6,525,815)
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ (6,692,190)
-------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............................... $ 811,905
=============
See Notes to Financial Statements Page 23
FIRST TRUST SHORT DURATION HIGH INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
10/31/2015 10/31/2014
------------- -------------
OPERATIONS:
Net investment income (loss)................................................... $ 7,504,095 $ 5,507,760
Net realized gain (loss)....................................................... (166,375) 404,020
Net change in unrealized appreciation (depreciation)........................... (6,525,815) (1,381,238)
------------- -------------
Net increase (decrease) in net assets resulting from operations................ 811,905 4,530,542
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A Shares................................................................. (1,790,616) (2,269,154)
Class C Shares................................................................. (789,673) (603,979)
Class I Shares................................................................. (4,083,110) (2,701,972)
------------- -------------
(6,663,399) (5,575,105)
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET REALIZED GAIN:
Class A Shares................................................................. (98,912) --
Class C Shares................................................................. (50,651) --
Class I Shares................................................................. (200,327) --
------------- -------------
(349,890) --
------------- -------------
Total distributions to shareholders............................................ (7,013,289) (5,575,105)
------------- -------------
CAPITAL TRANSACTIONS:
Proceeds from shares sold...................................................... 85,496,905 178,132,449
Proceeds from shares reinvested................................................ 6,034,789 5,083,225
Cost of shares redeemed........................................................ (83,897,426) (103,039,227)
------------- -------------
Net increase (decrease) in net assets resulting from capital transactions...... 7,634,268 80,176,447
------------- -------------
Total increase (decrease) in net assets........................................ 1,432,884 79,131,884
NET ASSETS:
Beginning of period............................................................ 180,867,660 101,735,776
------------- -------------
End of period.................................................................. $ 182,300,544 $ 180,867,660
============= =============
Accumulated net investment income (loss) at end of period...................... $ 815,397 $ (38,267)
============= =============
Page 24 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED OCTOBER 31, FOR THE PERIOD
------------------------------ ENDED
CLASS A SHARES 2015 2014 10/31/2013 (a)
-------------- -------------- --------------
Net asset value, beginning of period............ $ 20.54 $ 20.68 $ 20.00
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (b)................ 0.90 0.76 0.65
Net realized and unrealized gain (loss)......... (0.77) (0.12) 0.90
---------- ---------- ----------
Total from investment operations................ 0.13 0.64 1.55
---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................... (0.80) (0.78) (0.70)
Net realized gain............................... (0.04) -- --
Return of capital............................... -- -- (0.17)
---------- ---------- ----------
Total from distributions........................ (0.84) (0.78) (0.87)
---------- ---------- ----------
Net asset value, end of period.................. $ 19.83 $ 20.54 $ 20.68
========== ========== ==========
TOTAL RETURN (c)................................ 0.63% 3.14% 7.87% (d)
========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............ $ 53,433 $ 53,304 $ 44,819
Ratio of total expenses to average net assets... 1.26% 1.38% 1.54% (e)
Ratio of net expenses to average net assets..... 1.25% 1.25% 1.25% (e)
Ratio of net investment income (loss) to
average net assets........................... 4.43% 3.68% 3.20% (e)
Portfolio turnover rate......................... 58% 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 a payment from First Trust Advisors L.P. (the "Advisor")
in the amount of $1,079 in connection with a trade error. The payment from
the Advisor represents less than $0.01 per share and had no effect on the
total return of the Class A 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 ENDED OCTOBER 31, FOR THE PERIOD
------------------------------ ENDED
CLASS C SHARES 2015 2014 10/31/2013 (a)
-------------- -------------- --------------
Net asset value, beginning of period............ $ 20.52 $ 20.66 $ 20.00
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (b)................ 0.75 0.60 0.50
Net realized and unrealized gain (loss)......... (0.77) (0.11) 0.89
---------- ---------- ----------
Total from investment operations................ (0.02) 0.49 1.39
---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................... (0.65) (0.63) (0.59)
Net realized gain............................... (0.04) -- --
Return of capital............................... -- -- (0.14)
---------- ---------- ----------
Total from distributions........................ (0.69) (0.63) (0.73)
---------- ---------- ----------
Net asset value, end of period.................. $ 19.81 $ 20.52 $ 20.66
========== ========== ==========
TOTAL RETURN (c)................................ (0.12)% 2.38% 7.04% (d)
========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............ $ 25,213 $ 24,531 $ 13,522
Ratio of total expenses to average net assets... 2.01% 2.13% 2.29% (e)
Ratio of net expenses to average net assets..... 2.00% 2.00% 2.00% (e)
Ratio of net investment income (loss) to
average net assets........................... 3.68% 2.93% 2.45% (e)
Portfolio turnover rate......................... 58% 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 a payment from First Trust Advisors L.P. (the "Advisor")
in the amount of $1,079 in connection with a trade error. The payment from
the Advisor represents less than $0.01 per share and had no effect on the
total return of the Class C Shares.
(e) Annualized.
Page 26 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED OCTOBER 31, FOR THE PERIOD
------------------------------ ENDED
CLASS I SHARES 2015 2014 10/31/2013 (a)
-------------- -------------- --------------
Net asset value, beginning of period............ $ 20.54 $ 20.68 $ 20.00
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (b)................ 0.95 0.81 0.70
Net realized and unrealized gain (loss)......... (0.77) (0.12) 0.90
---------- ---------- ----------
Total from investment operations................ 0.18 0.69 1.60
---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................... (0.85) (0.83) (0.74)
Net realized gain............................... (0.04) -- --
Return of capital............................... -- -- (0.18)
---------- ---------- ----------
Total from distributions........................ (0.89) (0.83) (0.92)
---------- ---------- ----------
Net asset value, end of period.................. $ 19.83 $ 20.54 $ 20.68
========== ========== ==========
TOTAL RETURN (c)................................ 0.88% 3.40% 8.11% (d)
========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............ $ 103,655 $ 103,033 $ 43,395
Ratio of total expenses to average net assets... 1.01% 1.13% 1.29% (e)
Ratio of net expenses to average net assets..... 1.00% 1.00% 1.00% (e)
Ratio of net investment income (loss) to
average net assets........................... 4.68% 3.93% 3.45% (e)
Portfolio turnover rate......................... 58% 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 a payment from First Trust Advisors L.P. (the "Advisor")
in the amount of $1,079 in connection with a trade error. The payment from
the Advisor represents less than $0.01 per share and had no effect on the
total return of the Class I Shares.
(e) Annualized.
See Notes to Financial Statements Page 27
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2015
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 Fund, which is an investment company within the scope of Financial
Accounting Standards Board ("FASB") Accounting Standards Update 2013-08, follows
accounting and reporting guidance under FASB Accounting Standards Codification
Topic 946, "Financial Services-Investment Companies." The following is a summary
of significant accounting policies consistently followed by the Fund in the
preparation of its financial statements. The preparation of financial statements
in accordance with accounting principles generally accepted in the United States
of America ("U.S. GAAP") requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The net asset value ("NAV") 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 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 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.
-----------------------------
1 The terms "security" and "securities" used throughout the Notes to
Financial Statements include Senior Loans.
Page 28
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2015
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.
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, corporate 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.
Page 29
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2015
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of October 31, 2015, 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, 2015.
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
$47,872 as of October 31, 2015.
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,
2015, 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 $12,968, a
decrease in accumulated net realized gain (loss) on investments by $33,769 and
an increase to paid-in capital of $20,801. Net assets were not affected by this
reclassification.
Page 30
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2015
The tax character of distributions paid during the fiscal year ended October 31,
2015, and 2014, was as follows:
Distributions paid from: 2015 2014
Ordinary income.............................. $ 6,915,557 $ 5,575,105
Capital gain................................. 97,732 --
Return of capital............................ -- --
As of October 31, 2015, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income................ $ 1,167,264
Undistributed capital gains.................. --
-------------
Total undistributed earnings................. 1,167,264
Accumulated capital and other losses......... (208,644)
Net unrealized appreciation (depreciation)... (7,467,055)
-------------
Total accumulated earnings (losses).......... (6,508,435)
Other........................................ --
Paid-in capital.............................. 188,808,979
-------------
Net assets................................... $ 182,300,544
=============
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, 2015, the
Fund had non-expiring capital loss carryforwards of $208,644 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, 2014
and 2015 remain open to federal and state audit. As of October 31, 2015,
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, 2017, and then will not exceed 1.35% from
March 1, 2017, through February 28, 2026 (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 reimbursements for the year
ended October 31, 2015, and the expenses borne by First Trust subject to
recovery were as follows:
Page 31
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2015
EXPENSES SUBJECT TO RECOVERY
------------------------------------------------
PERIOD ENDED YEAR ENDED YEAR ENDED
ADVISORY EXPENSE OCTOBER 31, OCTOBER 31, OCTOBER 31,
FEE WAIVER REIMBURSEMENT 2013 2014 2015 TOTAL
------------ ------------ ------------ ------------ ------------ ------------
$11,894 $ -- $116,236 $188,551 $11,894 $316,681
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 YEAR ENDED
OCTOBER 31, 2015 OCTOBER 31, 2014
SHARES VALUE SHARES VALUE
---------- ------------- ---------- -------------
Sales:
Class A 1,258,674 $ 25,202,422 3,492,215 $ 71,976,299
Class C 348,495 7,101,059 687,294 14,196,208
Class I 2,616,387 53,193,424 4,450,496 91,959,942
---------- ------------- ---------- -------------
Total Sales: 4,223,556 $ 85,496,905 8,630,005 $ 178,132,449
========== ============= ========== =============
Dividend Reinvestment:
Class A 76,276 $ 1,547,654 103,831 $ 2,146,681
Class C 35,343 716,170 24,663 509,005
Class I 185,889 3,770,965 117,616 2,427,539
---------- ------------- ---------- -------------
Total Dividend Reinvestment: 297,508 $ 6,034,789 246,110 $ 5,083,225
========== ============= ========== =============
Redemptions:
Class A (1,235,840) $ (25,035,811) (3,168,303) $ (65,511,197)
Class C (306,658) (6,230,308) (171,124) (3,533,429)
Class I (2,591,742) (52,631,307) (1,650,504) (33,994,601)
---------- ------------- ---------- -------------
Total Redemptions: (4,134,240) $ (83,897,426) (4,989,931) $(103,039,227)
========== ============= ========== =============
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, 2015, were $101,670,987 and
$93,882,282, respectively.
Page 32
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2015
6. BORROWINGS
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 allocates 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. Effective February 6, 2015, the BNYM Line of Credit
was amended and the maximum commitment amount increased from $30 million to $80
million. The Fund borrowed $1,500,000 for a period of 4 days, from December 22,
2014 through December 25, 2014, at a rate of 1.38%. The Fund incurred interest
expense of $230 associated with this borrowing. As of October 31, 2015, the Fund
did not have any outstanding borrowings under the BNYM 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. Class I shares have no 12b-1
fees.
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 the following subsequent events:
On November 10, 2015, the BNYM Line of Credit was increased to $135 million.
At a meeting on December 7, 2015, the Board accepted Mr. Bradley's resignation
from his position as the President and Chief Executive Officer of the Trust,
effective December 31, 2015. At the same meeting, the Board elected Mr. Dykas to
serve as the President and Chief Executive Officer and Mr. Donald Swade,
formerly an Assistant Treasurer of the Trust, to serve as the Treasurer, Chief
Financial Officer and Chief Accounting Officer of the Trust.
Page 33
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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, 2015, 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 audit 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, 2015 by correspondence with the Fund's
custodian, brokers and agent banks; when replies were not received from brokers
and agent banks, 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, 2015, 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 22, 2015
Page 34
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2015 (UNAUDITED)
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio 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, 2015, none
qualify for the corporate dividends received deduction available to corporate
shareholders or as qualified dividend income.
For the year ended October 31, 2015, the amount of long-term capital gain
distributions designated by the Fund was $97,732 which is taxable at the
applicable capital gain tax rates for federal income purposes.
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.
Page 35
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2015 (UNAUDITED)
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 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 AGREEMENT
BOARD CONSIDERATIONS REGARDING CONTINUATION 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 16,
2015. The Board 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. At meetings held on April 20, 2015 and June 16, 2015, the
Board, including the Independent Trustees, reviewed materials provided by the
Advisor responding to requests for information from counsel to the Independent
Trustees that, among other things, outlined the services provided by the Advisor
(including the relevant personnel responsible for these services and their
Page 36
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2015 (UNAUDITED)
experience); the advisory fee for the Fund as compared to fees charged to other
clients of the Advisor and as compared to fees charged to a peer group of funds
selected by Management Practice, Inc. ("MPI"), an independent source (the "MPI
Peer Group"); expenses of the Fund as compared to expense ratios of the funds in
the MPI Peer Group; performance information for the Fund; the nature of expenses
incurred in providing services to the Fund and the potential for economies of
scale, if any; financial data on the Advisor; any fall-out benefits to the
Advisor and its affiliate, First Trust Portfolios L.P. ("FTP"); and information
on the Advisor's compliance program. The Board reviewed initial materials with
the Advisor at a special meeting held on April 20, 2015, at which the
Independent Trustees and their counsel met separately to discuss the information
provided by the Advisor. Following the April meeting, independent legal counsel
on behalf of the Independent Trustees requested certain clarifications and
supplements to the materials provided, and those were considered at an executive
session of the Independent Trustees and independent legal counsel held prior to
the June 16, 2015 meeting, as well as at the meeting. 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 April 20, 2015 meeting, the Board received a
presentation from the senior portfolio manager 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. The Board considered the significant asset
growth of the First Trust Fund Complex and the Advisor's concomitant investment
in infrastructure and personnel dedicated to the First Trust funds. 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 have been and are expected to 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 MPI showing the advisory fee
and expense ratio (Class A shares) of the Fund as compared to the advisory fees
and expense ratios of the MPI Peer Group. The Board discussed with
representatives of the Advisor the limitations in creating a relevant peer group
for the Fund, including that most of the funds in the MPI Peer Group have
mandates that require significant investment in either high-yield bonds or
senior loans, while the Fund has a strategy that allows for shifts between
high-yield bonds and 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 MPI Peer Group.
The Board considered that the Advisor agreed to waive fees and/or pay Fund
expenses through February 28, 2017 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, 2017 through February 28, 2026 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 were borne by the 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 MPI comparing the Fund's performance (based on Class A shares)
for the one-year and since-inception periods ended December 31, 2014 to the
performance of the MPI Peer Group and to a blended benchmark index. In reviewing
the Fund's performance as compared to the performance of the MPI Peer Group, the
Board took into account the limitations described above with respect to creating
a relevant peer group for the Fund. Based on the information presented, the
Board noted that the Fund's performance was above the median of the MPI Peer
Group for the one-year and since-inception periods ended December 31, 2014.
Page 37
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2015 (UNAUDITED)
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 made and continues to make significant
investments 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, 2014, 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 38
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2015 (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; 117 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 117 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 117 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 117 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 117 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 39
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2015 (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. 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/
Wheaton, IL 60187 Investment Advisor); Secretary of Stonebridge
D.O.B.: 05/60 Advisors LLC (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 Advisors 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
D.O.B.: 12/66 January 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 40
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PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2015 (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 41
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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 $112,500 for 2014 and $109,000 for 2015.
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 2014 and $0 for 2015.
(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 2014 and $0 for 2015.
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 2014 and $0 for the Investment Adviser and $0 for the
Distributor 2015.
(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 $15,200 for 2014 and
$15,200 for 2015.
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 2014 and $0 for the Investment Adviser and $0 for the Distributor
2015.
(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 2014 and $0 for 2015.
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 2014 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 $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, and $15,200 for the registrant,
$12,500 for the registrant's investment adviser, $3,000 for the
registrant's sub-advisor and $36,500 for the registrant's distributor for
2015.
(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
-------------------------------------------------
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: December 22, 2015
--------------------
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
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Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: December 22, 2015
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By (Signature and Title)* /s/ James M. Dykas
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James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: December 22, 2015
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* Print the name and title of each signing officer under his or her signature.