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 811-23072
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First Trust Dynamic Europe Equity Income 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: December 31
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Date of reporting period: December 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
DYNAMIC EUROPE
EQUITY INCOME FUND
(FDEU)
ANNUAL REPORT
FOR THE PERIOD
SEPTEMBER 24, 2015
(COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 2015
FIRST TRUST
HENDERSON
GLOBAL INVESTORS
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TABLE OF CONTENTS
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FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
ANNUAL REPORT
DECEMBER 31, 2015
Shareholder Letter.......................................................... 1
At a Glance................................................................. 2
Portfolio Commentary........................................................ 3
Portfolio of Investments.................................................... 5
Statement of Assets and Liabilities......................................... 10
Statement of Operations..................................................... 11
Statement of Changes in Net Assets.......................................... 12
Statement of Cash Flows..................................................... 13
Financial Highlights........................................................ 14
Notes to Financial Statements............................................... 15
Report of Independent Registered Public Accounting Firm..................... 22
Additional Information...................................................... 23
Board of Trustees and Officers.............................................. 28
Privacy Policy.............................................................. 30
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Henderson Global Investors (North America) Inc.
("Henderson" 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 Dynamic Europe Equity 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 the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's webpage at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. It includes details about the Fund and presents data and analysis that
provide insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Henderson 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 filing.
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SHAREHOLDER LETTER
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FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
DECEMBER 31, 2015
Dear Shareholders:
Thank you for your investment in First Trust Dynamic Europe Equity Income Fund
(the "Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with this
annual report which contains detailed information about your investment for the
time period since the Fund's inception (September 24, 2015) to December 31,
2015, including a performance analysis and a market outlook. Additionally, First
Trust has compiled the Fund's financial statements for you to review. We
encourage you to read this report and discuss it with your financial advisor.
While overall there was slower economic growth in the European markets, and the
Euro was off approximately 3% compared to the U.S. dollar (Bloomberg), we are
pleased that over the three months the Fund was in operation, its net asset
value ("NAV") was stable. The Fund's NAV was $19.10 as of its inception date and
$19.07 as of December 31, 2015. As well, investors received the first
distribution of income from the Fund in early December.
First Trust believes that having a long-term investment horizon and being
invested in quality products can help you reach your goals, despite the ups and
downs in the market. We have always maintained perspective about the markets and
believe investors should as well. We will continue to strive to provide quality
investments each and every day, which has been one of the hallmarks of our firm
since its inception nearly 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue to focus on helping
investors like you reach your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
"AT A GLANCE"
AS OF DECEMBER 31, 2015 (UNAUDITED)
-------------------------------------------------------------------
FUND STATISTICS
-------------------------------------------------------------------
Symbol on New York Stock Exchange FDEU
Common Share Price $17.16
Common Share Net Asset Value ("NAV") $19.07
Premium (Discount) to NAV (10.02)%
Net Assets Applicable to Common Shares $328,647,814
Current Monthly Distribution per Common Share (1) $0.121
Current Annualized Distribution per Common Share $1.452
Current Distribution Rate on Closing Common Share Price (2) 8.46%
Current Distribution Rate on NAV (2) 7.61%
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-----------------------------------------------
COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
-----------------------------------------------
Common Share Price NAV
9/24/15 $20.00 $19.10
9/15 20.00 19.06
20.03 19.23
20.04 19.91
20.00 20.04
20.00 20.10
10/15 20.00 19.90
20.00 19.55
18.42 19.04
18.65 19.64
11/15 18.03 19.51
18.33 19.37
17.26 18.58
17.02 18.73
17.25 19.24
12/15 17.16 19.07
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PERFORMANCE
----------------------------------------------------------------------------------------------
Cumulative Total Return
-------------------------
Inception (9/24/2015)
to 12/31/2015
FUND PERFORMANCE (3)
NAV 0.52%
Market Value -13.61%
INDEX PERFORMANCE
MSCI Europe Index 4.30%
----------------------------------------------------------------------------------------------
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% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
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Roche Holding AG (CHF) 4.2%
Orange SA (EUR) 3.8
Novartis AG (CHF) 3.7
Zurich Insurance Group AG (CHF) 3.5
Vodafone Group PLC (GBP) 3.3
Nestle SA (CHF) 3.0
Syngenta AG (CHF) 3.0
Imperial Tobacco Group PLC (GBP) 2.9
Deutsche Post AG (EUR) 2.8
HSBC Holdings PLC (GBP) 2.7
-----------------------------------------------------
Total 32.9%
======
-----------------------------------------------------
% OF TOTAL
COUNTRY ALLOCATION INVESTMENTS
-----------------------------------------------------
United Kingdom 31.7%
France 24.0
Switzerland 21.8
Germany 5.8
Netherlands 5.4
Luxembourg 3.8
Italy 3.5
Spain 2.1
Norway 1.9
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Total 100.0%
======
-----------------------------------------------------
% OF TOTAL
SECTOR CLASSIFICATION INVESTMENTS
-----------------------------------------------------
Financials 27.6%
Health Care 13.9
Consumer Staples 13.2
Consumer Discretionary 11.7
Telecommunication Services 9.0
Industrials 7.7
Utilities 7.2
Materials 5.8
Energy 3.9
-----------------------------------------------------
Total 100.0%
======
(1) Most recent distribution paid or declared through 12/31/2015. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 12/31/2015. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per Common Share for NAV
returns and changes in Common Share Price for market value returns. Total
returns do not reflect sales load and are not annualized for periods of
less than one year. Past performance is not indicative of future results.
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
ANNUAL REPORT
DECEMBER 31, 2015 (UNAUDITED)
MARKET RECAP
The MSCI Europe Index (the "Index") gained slightly over the period from the
Fund's inception through December 31, 2015. The performance of the region in
dollar terms was impacted by further weakness in both the Euro and Sterling,
particularly during December. In local currency terms, European stock markets
recovered from the sell-off earlier in the year, driven by improving economic
data for the region. Natural resource prices continued to fall over the period
as supply in several markets continued to grow, impacting the oil, gas and
materials sectors, and reducing inflation expectations. The European Central
Bank ("ECB") committed to extending its Quantitative Easing ("QE") program in
response to persistent low levels of inflation.
PERFORMANCE ANALYSIS
The Fund was launched on September 24, 2015. The raised proceeds of the Fund
were invested immediately in European dividend-paying equities. The net asset
value total return was positive for the quarter, and the Fund commenced paying
monthly distributions in December. The market price return of Common Shares in
the Fund was negative over the period, as the result of the Common Shares moving
from a premium to net asset value at the start of the period to a discount at
the end.
The Index returned 2.5% over the fourth quarter. After a sharp selloff over
summer, markets recovered and were driven by positive European economic data.
This resulted in the outperformance of some economically exposed sectors,
including the automotive and insurance sectors. Weakness in commodity prices
resulted in weak performance from the resources and oil service sectors. Sectors
exposed to emerging market economies were weak, including luxury goods and some
areas of the industrials sector.
The Fund underperformed the Index over the period. The most significant
detractors to performance over the period were companies with exposure to
emerging market economies, particularly China. Hugo Boss reported weak sales
figures, in common with much of the luxury goods sector, and mining
conglomerates Rio Tinto and BHP Billiton were impacted by ongoing weak commodity
prices. The portfolio did not have a significantly larger exposure to emerging
markets than the Index, and was underweight the energy sector, but these
exposures were enough to impact relative performance. The leverage utilized by
the Fund generated positive capital returns and helped enhance income
generation.
At a stock level, the most significant positive contributors to performance over
the period included crop protection and seed manufacturer Syngenta, which has
been linked with several parties as a takeover candidate. French
telecommunications companies Orange and Numericable also performed well on
speculation that the industry could consolidate further. Within the financials
sector, the Fund's overweight position versus the Index in insurance and
diversified financials, and underweight position in banks, were positive
performance drivers.
The Fund utilizes a dynamic currency hedging process to mitigate the risk of
adverse currency movements on the portfolio. Throughout the period, the Fund
borrowed in Euros and utilized foreign currency forward contracts to provide
some protection against the Euro weakness versus the U.S. dollar over the
period. In December, a forward currency contract was put in place to mitigate
the risk of Sterling weakness due to concerns regarding the United Kingdom's
potential referendum on European Union membership. The currency hedging
activities were a positive contributor to performance over the period.
The Fund utilizes an option overlay strategy to generate additional income for
investors. The option overlay strategy performed as expected during the
performance period from the Fund launch through December 31, 2015. Approximately
30% of the gross assets of the Fund are overwritten using index call options on
the EuroStoxx 50 Index. The alternatives team at First Trust invested the option
strategy throughout the month of October. The team was able to dollar cost
average into a fully invested portfolio as the strong equity rally (+10.38% in
October for the EuroStoxx 50 Index) benefitted the Fund's equity holdings and
allowed the First Trust alternatives team to write options at higher strikes
throughout the month. After full implementation of the overlay strategy, the
option portfolio was a slight drag on the Fund's performance in November as the
EuroStoxx 50 Index rallied 2.73% during the month. However, in December global
equities once again declined upon growth concerns, with the EuroStoxx 50 Index
declining 6.70%, benefitting the option overlay portfolio. Overall, the option
strategy generated a small positive contribution to the Fund's performance
during the period and accomplished the Fund's overall strategy goal of
generating option premium cash flow to support the overall Fund distribution.
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
ANNUAL REPORT
DECEMBER 31, 2015 (UNAUDITED)
MARKET AND FUND OUTLOOK
Expected economic growth in the Eurozone area is picking up. Gross Domestic
Product forecasts for countries such as France, Germany and Spain have been
gradually revised upwards in recent months. As a natural resources importer, we
believe the European region should continue to benefit from low oil and gas
prices. During 2015, the ECB introduced monetary policy aimed at stimulating
growth and inflation and reinforced its commitment to this in December. We
expect these factors to be supportive for European consumers, and help the
earnings of European companies recover from depressed levels. European interest
rates remain very low and are not expected to rise for some time. We expect a
continuing demand for companies with attractive and sustainable dividend yields,
such as those held in the portfolio.
Page 4
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 2015
SHARES DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
COMMON STOCKS - 117.2%
AIR FREIGHT & LOGISTICS - 3.5%
410,955 Deutsche Post AG (a) (b)........................... $ 11,489,401
--------------
BANKS - 9.8%
1,526,423 Barclays PLC (a) (b)............................... 4,913,204
169,059 BNP Paribas S.A. (a) (b)........................... 9,564,907
1,386,341 HSBC Holdings PLC (a) (b).......................... 10,944,075
502,046 ING Groep N.V. (b)................................. 6,792,701
--------------
32,214,887
--------------
BEVERAGES - 2.9%
354,833 Diageo PLC (a) (b)................................. 9,689,694
--------------
BUILDING PRODUCTS - 3.0%
225,643 Cie de Saint-Gobain (a) (b)........................ 9,778,302
--------------
CHEMICALS - 4.5%
67,530 Johnson Matthey PLC (a) (b)........................ 2,641,630
31,115 Syngenta AG (a) (b)................................ 12,178,508
--------------
14,820,138
--------------
CONSUMER FINANCE - 2.3%
116,232 Cembra Money Bank AG (a) (b)....................... 7,455,293
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 7.0%
922,591 Orange S.A. (a) (b)................................ 15,431,009
464,808 Telenor ASA (a) (b)................................ 7,747,686
--------------
23,178,695
--------------
ELECTRIC UTILITIES - 5.2%
2,038,892 Enel S.p.A. (a) (b)................................ 8,549,697
100,890 Red Electrica Corp. S.A. (a) (b)................... 8,427,307
--------------
16,977,004
--------------
FOOD PRODUCTS - 3.8%
166,377 Nestle S.A. (a) (b)................................ 12,351,039
--------------
GAS UTILITIES - 1.8%
1,108,992 Snam S.p.A. (a) (b)................................ 5,787,762
--------------
INSURANCE - 13.0%
342,588 AXA S.A. (a) (b)................................... 9,360,729
32,729 Muenchener Rueckversicherungs-Gesellschaft AG in
Muenchen (a) (b)................................ 6,520,833
274,194 Prudential PLC (a) (b)............................. 6,177,451
171,398 SCOR SE (a) (b).................................... 6,413,326
55,945 Zurich Insurance Group AG (a) (b).................. 14,372,271
--------------
42,844,610
--------------
MEDIA - 12.8%
301,724 Lagardere SCA (a) (b).............................. 9,003,878
85,413 Numericable-SFR SAS (a) (b)........................ 3,102,881
301,947 Reed Elsevier N.V. (a) (b)......................... 5,085,482
94,167 RTL Group S.A. (a) (b)............................. 7,871,404
278,650 SES Global (a) (b)................................. 7,721,311
409,879 WPP PLC (a) (b).................................... 9,427,947
--------------
42,212,903
--------------
See Notes to Financial Statements Page 5
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2015
SHARES DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
COMMON STOCKS (CONTINUED)
METALS & MINING - 2.6%
248,428 BHP Billiton PLC (a) (b)........................... $ 2,770,424
202,484 Rio Tinto PLC (a) (b).............................. 5,895,377
--------------
8,665,801
--------------
MULTI-UTILITIES - 2.0%
481,539 National Grid PLC (a) (b).......................... 6,641,186
--------------
OIL, GAS & CONSUMABLE FUELS - 4.8%
357,313 Royal Dutch Shell PLC (a) (b)...................... 8,149,264
167,545 TOTAL S.A. (a) (b)................................. 7,511,276
--------------
15,660,540
--------------
PERSONAL PRODUCTS - 3.1%
230,391 Unilever N.V. (b).................................. 10,041,386
--------------
PHARMACEUTICALS - 17.2%
151,829 AstraZeneca PLC (a) (b)............................ 10,255,647
168,387 GlaxoSmithKline PLC (a) (b)........................ 3,400,717
175,383 Novartis AG (a) (b)................................ 15,086,319
61,403 Roche Holding AG (a) (b)........................... 17,015,288
127,665 Sanofi (a) (b)..................................... 10,879,837
--------------
56,637,808
--------------
PROFESSIONAL SERVICES - 3.1%
5,360 SGS S.A. (a) (b)................................... 10,186,683
--------------
REAL ESTATE MANAGEMENT & DEVELOPMENT - 2.5%
182,851 Nexity S.A. (a) (b)................................ 8,099,656
--------------
TEXTILES, APPAREL & LUXURY GOODS - 1.7%
66,897 Hugo Boss AG (a) (b)............................... 5,519,614
--------------
TOBACCO - 6.6%
176,409 British American Tobacco PLC (a) (b)............... 9,796,703
224,220 Imperial Tobacco Group PLC (a) (b)................. 11,842,774
--------------
21,639,477
--------------
WIRELESS TELECOMMUNICATION SERVICES - 4.0%
4,086,923 Vodafone Group PLC (a) (b)......................... 13,252,938
--------------
TOTAL COMMON STOCKS................................ 385,144,817
(Cost $386,802,318) --------------
REAL ESTATE INVESTMENT TRUSTS - 6.7%
REAL ESTATE INVESTMENT TRUSTS - 6.7%
127,105 Icade (a) (b)...................................... 8,531,283
162,666 Eurocommercial Properties N.V. (a) (b)............. 7,027,220
548,780 British Land Co., PLC (a) (b)...................... 6,349,861
--------------
TOTAL REAL ESTATE INVESTMENT TRUSTS................ 21,908,364
(Cost $23,056,780) --------------
TOTAL INVESTMENTS - 123.9%......................... 407,053,181
(Cost $409,859,098) (c) --------------
Page 6 See Notes to Financial Statements
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2015
NUMBER OF
CONTRACTS DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
CALL OPTIONS WRITTEN - (0.7%)
EURO STOXX 50 PRICE
581 @ $3,525 due January 2016.......................... $ (10,097)
578 @ 3,525 due January 2016.......................... (10,056)
--------------
(20,153)
--------------
EURO STOXX 50 PRICE
580 @ 3,500 due February 2016......................... (136,111)
--------------
EURO STOXX 50 PRICE
927 @ 3,325 due March 2016............................ (1,092,733)
--------------
EURO STOXX 50 PRICE
768 @ 3,325 due March 2016............................ (905,764)
--------------
TOTAL CALL OPTIONS WRITTEN......................... (2,154,761)
(Premiums received $3,707,791) --------------
OUTSTANDING LOAN - (27.1%)......................... (89,113,498)
NET OTHER ASSETS AND LIABILITIES - 3.9%............ 12,862,892
--------------
NET ASSETS - 100.0%................................ $ 328,647,814
==============
-----------------------------
(a) 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 December 31, 2015, securities noted as such are valued at
$390,219,094 or 118.73% of net assets. These securities are fair valued
using a factor provided by an independent pricing service due to the
change in value between the foreign markets' close and the New York Stock
Exchange close exceeding a certain threshold. On days when this threshold
is not exceeded, these securities are typically valued at the last sale
price on the exchange on which they are principally traded.
(b) All or a portion of this security serves as collateral on the outstanding
loan.
(c) Aggregate cost for federal income tax purposes is $409,899,706. As of
December 31, 2015, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$17,112,429 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$19,958,954.
Currency Abbreviations:
EUR Euro
GBP British Pound Sterling
USD United States Dollar
See Notes to Financial Statements Page 7
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2015
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of December 31,
2015 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
12/31/2015 PRICES INPUTS INPUTS
--------------------------------------------------- ------------- ------------- ------------- -------------
Common Stocks:
Banks........................................... $ 32,214,887 $ 6,792,701 $ 25,422,186 $ --
Personal Products .............................. 10,041,386 10,041,386 -- --
Other Industry Categories*...................... 342,888,544 -- 342,888,544 --
------------- ------------- ------------- -------------
Total Common Stocks................................ 385,144,817 16,834,087 368,310,730 --
Real Estate Investment Trusts...................... 21,908,364 -- 21,908,364 --
------------- ------------- ------------- -------------
Total Investments.................................. 407,053,181 16,834,087 390,219,094 $ --
Forward Foreign Currency Contracts**............... 939,717 -- 939,717 --
------------- ------------- ------------- -------------
Total.............................................. $ 407,992,898 $ 16,834,087 $ 391,158,811 --
============= ============= ============= =============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
12/31/2015 PRICES INPUTS INPUTS
------------- ------------- ------------- -------------
Call Options Written............................... $ (2,154,761) $ -- $ (2,154,761) $ --
============= ============= ============= =============
* See Portfolio of Investments for industry breakout.
** See the Forward Foreign Currency Contracts table for contract and currency
detail.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at December 31, 2015. The securities classified as
Level 2 in the above table are listed as such because on December 31, 2015 they
were fair valued using a factor provided by a pricing service due to the change
in value between the foreign markets' close and the New York Stock Exchange
close exceeding a certain threshold. On days when this threshold is not
exceeded, these securities are typically valued at the last sale price on the
exchange on which they are principally traded and would typically be classified
as Level 1. The inputs or methodologies used for valuing securities and
classifying them in one of the three levels of the fair value hierarchy are not
necessarily an indication of the risk associated with investing in those
securities.
Page 8 See Notes to Financial Statements
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2015
FORWARD FOREIGN CURRENCY CONTRACTS (see Note 2C - Forward Foreign Currency
Contracts in the Notes to Financial Statements):
FORWARD FOREIGN CURRENCY CONTRACTS
-------------------------------------------------------------
PURCHASE SALE UNREALIZED
SETTLEMENT AMOUNT AMOUNT VALUE AS OF VALUE AS OF APPRECIATION
DATE COUNTERPARTY PURCHASED (1) SOLD (1) DECEMBER 31, 2015 DECEMBER 31, 2015 (DEPRECIATION)
------------- ------------ ------------------ -------------------- ----------------- ----------------- --------------
02/04/16 BNS USD 32,000,000 GBP 21,097,742 $32,000,000 $31,104,905 $ 895,095
02/04/16 BNS USD 40,000,000 EUR 36,738,051 40,000,000 39,955,378 44,622
--------------
Net Unrealized Appreciation (Depreciation)...................................................................... $ 939,717
==============
(1) Please see Portfolio of Investments for currency descriptions.
Counterparty Abbreviations:
BNS Bank of Nova Scotia
CURRENCY EXPOSURE % OF TOTAL
DIVERSIFICATION INVESTMENTS (2)
-------------------------------------------------
Euro 38.4%
Swiss Franc 21.7
British Pound Sterling 20.3
United States Dollar 17.7
Norwegian Krone 1.9
-------------------------------------------------
Total 100.0%
======
(2) The weightings include the impact of currency forwards.
See Notes to Financial Statements Page 9
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2015
ASSETS:
Investments, at value
(Cost $409,859,098)............................................................................ $407,053,181
Cash.............................................................................................. 12,341,609
Foreign currency (Cost $357,992).................................................................. 357,289
Unrealized appreciation (depreciation) on forward foreign currency contracts...................... 939,717
Receivables:
Dividends...................................................................................... 509,596
Prepaid expenses.................................................................................. 5,869
------------
Total Assets................................................................................... 421,207,261
------------
LIABILITIES:
Outstanding loan.................................................................................. 89,113,498
Options written, at value (Premiums received $3,707,791).......................................... 2,154,761
Payables:
Investment advisory fees....................................................................... 390,558
Investment securities purchased................................................................ 340,950
Offering costs................................................................................. 258,000
Interest and fees due on loan.................................................................. 133,051
Administrative fees............................................................................ 45,304
Audit and tax fees............................................................................. 44,700
Printing fees.................................................................................. 37,315
Custodian fees................................................................................. 28,976
Transfer agent fees............................................................................ 8,579
Financial reporting fees....................................................................... 771
Trustees' fees and expenses.................................................................... 196
Other liabilities................................................................................. 2,788
------------
Total Liabilities.............................................................................. 92,559,447
------------
NET ASSETS........................................................................................ $328,647,814
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................... $328,297,124
Par value......................................................................................... 172,319
Accumulated net investment income (loss).......................................................... (645,561)
Accumulated net realized gain (loss) on investments, options and foreign currency transactions.... (40,609)
Net unrealized appreciation (depreciation) on investments, options, forward foreign currency
contracts, and foreign currency translation.................................................... 864,541
------------
NET ASSETS........................................................................................ $ 28,647,814
============
NET ASSET VALUE, per share........................................................................ $ 19.07
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized)....... 17,231,908
============
Page 10 See Notes to Financial Statements
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 2015 (a)
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $193,504)............................................ $ 2,176,656
------------
Total investment income........................................................................ 2,176,656
------------
EXPENSES:
Investment advisory fees.......................................................................... 1,149,864
Interest and fees on loan......................................................................... 133,556
Administrative fees............................................................................... 45,304
Audit and tax fees................................................................................ 44,700
Printing fees..................................................................................... 37,500
Custodian fees.................................................................................... 28,976
Transfer agent fees............................................................................... 8,579
Listing expense................................................................................... 6,312
Trustees' fees and expenses....................................................................... 5,110
Legal fees........................................................................................ 3,189
Financial reporting fees.......................................................................... 3,083
Other............................................................................................. 6,355
------------
Total expenses................................................................................. 1,472,528
------------
NET INVESTMENT INCOME (LOSS)...................................................................... 704,128
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments.................................................................................... 1,103,724
Written option transactions.................................................................... (266,209)
Foreign currency transactions.................................................................. (142,752)
------------
Net realized gain (loss).......................................................................... 694,763
------------
Net change in unrealized appreciation (depreciation) on:
Investments.................................................................................... (2,805,917)
Written options held........................................................................... 1,553,030
Forward foreign currency contracts............................................................. 939,717
Foreign currency translation................................................................... 1,177,711
------------
Net change in unrealized appreciation (depreciation).............................................. 864,541
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................... 1,559,304
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................... $ 2,263,432
============
(a) The Fund was seeded on August 20, 2015 and commenced operations on
September 24, 2015.
See Notes to Financial Statements Page 11
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
STATEMENT OF CHANGES IN NET ASSETS
PERIOD
ENDED
12/31/2015 (a)
--------------
OPERATIONS:
Net investment income (loss)...................................................... $ 704,128
Net realized gain (loss).......................................................... 694,763
Net change in unrealized appreciation (depreciation).............................. 864,541
------------
Net increase (decrease) in net assets resulting from operations................... 2,263,432
------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................. (1,206,937)
Net realized gain................................................................. (878,124)
------------
Total distributions to shareholders............................................... (2,085,061)
------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold......................................................... 329,129,443
Cost of shares redeemed........................................................... --
Offering costs.................................................................... (660,000)
------------
Net increase (decrease) in net assets resulting from shareholder transactions..... 328,469,443
------------
Total increase (decrease) in net assets........................................... 328,647,814
NET ASSETS:
Beginning of period............................................................... --
------------
End of period..................................................................... $328,647,814
============
Accumulated net investment income (loss) at end of period......................... $ (645,561)
============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period........................................... --
Shares sold....................................................................... 17,231,908
------------
Shares outstanding, end of period................................................. 17,231,908
============
(a) The Fund was seeded on August 20, 2015 and commenced operations on
September 24, 2015.
Page 12 See Notes to Financial Statements
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
STATEMENT OF CASH FLOWS
FOR THE PERIOD ENDED DECEMBER 31, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations..................... $ 2,263,432
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash used by operating activities:
Purchases of investments...................................................... (425,874,630)
Sales of investments.......................................................... 17,460,206
Proceeds from written options................................................. 4,954,634
Amount paid to close written options.......................................... (1,513,052)
Net realized gain/loss on investments and written option transactions......... (837,515)
Net change in unrealized appreciation/depreciation on investments and
written options held....................................................... 1,252,887
Net change in unrealized appreciation/depreciation on forward foreign
currency contracts......................................................... (939,717)
CHANGES IN ASSETS AND LIABILITIES:
Increase in dividends receivable.............................................. (509,596)
Increase in prepaid expenses.................................................. (5,869)
Increase in interest and fees on loan payable................................. 133,051
Increase in offering costs payable ........................................... 258,000
Increase in investment advisory fees payable.................................. 390,558
Increase in audit and tax fees payable........................................ 44,700
Increase in printing fees payable............................................. 37,315
Increase in administrative fees payable....................................... 45,304
Increase in custodian fees payable............................................ 28,976
Increase in transfer agent fees payable....................................... 8,579
Increase in Trustees' fees and expenses payable............................... 196
Increase in financial reporting fees payable.................................. 771
Increase in other liabilities payable......................................... 2,788
------------
CASH USED IN OPERATING ACTIVITIES................................................... $ (402,798,982)
---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of Common Shares sold................................................ 329,129,443
Distributions to Common Shareholders from:
Net investment income...................................................... (1,206,937)
Net realized gain.......................................................... (878,124)
Offering Costs................................................................ (660,000)
Proceeds from Euro borrowings ................................................ 90,305,698
Effect of exchange rate changes on Euro Borrowings (a)........................ (1,192,200)
------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES......................................... 415,497,880
---------------
Increase in cash and foreign currency (b)........................................... 12,698,898
Cash and foreign currency at beginning of period.................................... --
---------------
CASH AND FOREIGN CURRENCY AT END OF PERIOD.......................................... $ 12,698,898
===============
(a) This amount is a component of net change in unrealized appreciation
(depreciation) on foreign currency translation as shown on the Statement
of Operations.
(b) Includes net change in unrealized appreciation (depreciation) on foreign
currency of $(14,489), which does not include the effect of exchange rate
changes on Euro borrowings.
See Notes to Financial Statements Page 13
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD
FOR THE PERIOD
9/24/2015 (a)
THROUGH
12/31/2015
--------------
Net asset value, beginning of period........ $ 19.10
----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................ 0.04
Net realized and unrealized gain (loss)..... 0.05
----------
Total from investment operations............ 0.09
----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income....................... (0.07)
Net realized gain........................... (0.05)
----------
Total distributions......................... (0.12)
----------
Net asset value, end of period.............. $ 19.07
==========
Market value, end of period................. $ 17.16
==========
TOTAL RETURN BASED ON NET ASSET VALUE (b)... 0.52%
==========
TOTAL RETURN BASED ON MARKET VALUE (b)...... (13.61)%
==========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........ $ 328,648
Ratio of total expenses to average net
assets................................... 1.72% (c)
Ratio of net expenses to average net assets
excluding interest expense............... 1.56% (c)
Ratio of net investment income (loss) to
average net assets....................... 0.82% (c)
Portfolio turnover rate..................... 5%
INDEBTEDNESS:
Total loan outstanding (in 000's)........... $ 89,113
Asset coverage per $1,000 of
indebtedness (d)......................... $ 4,688
-----------------------------
(a) The Fund was seeded on August 20, 2015 and commenced operations on
September 24, 2015.
(b) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in net asset value per Common
Share for net asset value returns and changes in Common Share price for
market value returns. Total returns do not reflect sales load and are not
annualized for periods of less than one year. Past performance is not
indicative of future results.
(c) Annualized.
(d) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the loan outstanding) and dividing by the loan
balance in 000's.
Page 14 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 31, 2015
1. ORGANIZATION
First Trust Dynamic Europe Equity Income Fund (the "Fund") is a non-diversified,
closed-end management investment company organized as a Massachusetts business
trust on May 11, 2015, and is registered with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund trades under the ticker symbol "FDEU" on the New York Stock
Exchange ("NYSE").
The Fund's investment objective is to provide a high level of current income,
with a secondary focus on capital appreciation. The Fund pursues its objective
by investing under normal market conditions at least 80% of its Managed Assets
(as defined below) in a portfolio of equity securities of European companies of
any market capitalization. "Managed Assets" means the total asset value of the
Fund minus the sum of the Fund's liabilities other than the principal amount of
borrowings, if any. There can be no assurance that the Fund will achieve its
investment objective.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund, which is an investment company within the scope of Financial
Accounting Standards Board ("FASB") Accounting Standards Update 2013-08, follows
accounting and reporting guidance under FASB Accounting Standards Codification
Topic 946, "Financial Services-Investment Companies." The following is a summary
of significant accounting policies consistently followed by the Fund in the
preparation of its financial statements. The preparation of financial statements
in accordance with accounting principles generally accepted in the United States
of America ("U.S. GAAP") requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The net asset value ("NAV") of the Common Shares of the Fund is determined daily
as of the close of regular trading on the NYSE, normally 4:00 p.m. Eastern time,
on each day the NYSE is open for trading. If the NYSE closes early on a
valuation day, the NAV is determined as of that time. Domestic debt securities
and foreign securities are priced using data reflecting the earlier closing of
the principal markets for those securities. The Fund's NAV per Common Share is
calculated by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses,
dividends declared but unpaid and any borrowings of the Fund), by the total
number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Fund's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Fund's Board of Trustees,
and in accordance with provisions of the 1940 Act. Investments valued by the
Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to
the Portfolio of Investments. The Fund's investments are valued as follows:
Common stocks, real estate investment trusts 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.
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.
Over-the-counter options contracts are fair valued at the closing price in
the market of the underlying contracts where such contracts are
principally traded.
Forward foreign currency contracts are valued at the current day's
interpolated foreign exchange rate, as calculated using the current day's
spot rate, and the thirty, sixty, ninety, and one-hundred eighty day
forward rates provided by an independent pricing service or by certain
independent dealers in such contracts.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) 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 DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 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 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 statement;
9) the existence of merger proposals or tender offers that might affect
the value of the security;
10) the value of similar foreign securities traded on other foreign
markets;
11) ADR trading of similar securities;
12) closed-end fund trading of similar securities;
13) foreign currency exchange activity;
14) the trading prices of financial products that are tied to baskets of
foreign securities;
15) factors relating to the event that precipitated the pricing problem;
16) whether the event is likely to recur; and
17) whether the effects of the event are isolated or whether they affect
entire markets, countries or regions.
Because foreign markets may be open on different days than the days during which
investors may transact in the shares of the Fund, the value of the Fund's
securities may change on the days when investors are not able to transact in the
shares of the Fund. The value of securities denominated in foreign currencies is
converted into U.S. dollars using exchange rates determined daily as of the
close of regular trading on the NYSE.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of December 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. Amortization of premiums and accretion of discounts
are recorded by using the effective interest method.
C. FORWARD FOREIGN CURRENCY CONTRACTS
The Fund is subject to foreign currency risk in the normal course of pursuing
its investment objective. Forward foreign currency contracts are agreements
between two parties ("Counterparties") to exchange one currency for another at a
future date and at a specified price. The Fund uses forward foreign currency
contracts to facilitate transactions in foreign securities and to manage the
Fund's foreign currency exposure. These contracts are valued daily, and the
Fund's net equity therein, representing unrealized gain or loss on the contracts
as measured by the difference between the forward foreign exchange rates at the
dates of entry into the contracts and the forward rates at the reporting date,
is included in "Unrealized appreciation (depreciation) on forward foreign
currency contracts" on the Statement of Assets and Liabilities. The change in
unrealized appreciation (depreciation) is included in "Net change in unrealized
appreciation (depreciation) on forward foreign currency contracts" on the
Statement of Operations. When the forward contract is closed, the Fund records a
Page 16
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 31, 2015
realized gain or loss equal to the difference between the proceeds from (or the
cost of) the closing transaction and the Fund's basis in the contract. This
realized gain or loss would be included in "Net realized gain (loss) on forward
foreign currency contracts" on the Statement of Operations. Risks arise from the
possible inability of counterparties to meet the terms of their contracts and
from movement in currency and securities values and interest rates. Due to the
risks, the Fund could incur losses in excess of the net unrealized value shown
on the Forward Foreign Currency Contracts table in the Portfolio of Investments.
In the event of default by the Counterparty, the Fund will provide notice to the
Counterparty of the Fund's intent to convert the currency held by the Fund into
the currency that the counterparty agreed to exchange with the Fund. If a
Counterparty becomes bankrupt or otherwise fails to perform its obligations due
to financial difficulties, the Fund may experience significant delays in
obtaining any recovery in a bankruptcy or other reorganizing process. The Fund
may obtain only limited recovery or may obtain no recovery in such
circumstances.
D. OFFSETTING ON THE STATEMENTS OF ASSETS AND LIABILITIES
Offsetting Assets and Liabilities requires entities to disclose both gross and
net information about instruments and transactions eligible for offset on the
Statement of Assets and Liabilities, and disclose instruments and transactions
subject to master netting or similar agreements. These disclosure requirements
are intended to help investors and other financial statement users better assess
the effect or potential effect of offsetting arrangements on a fund's financial
position. The transactions subject to offsetting disclosures are derivative
instruments, repurchase agreements and reverse repurchase agreements, and
securities borrowing and securities lending transactions.
For financial reporting purposes, the Fund does not offset financial assets and
financial liabilities that are subject to master netting arrangements ("MNAs")
or similar agreements on the Statements of Assets and Liabilities. MNAs provide
the right, in the event of default (including bankruptcy and insolvency) for the
non-defaulting counterparty to liquidate the collateral and calculate the net
exposure to the defaulting party or request additional collateral.
At December 31, 2015, derivative assets and liabilities (by type) on a gross
basis are as follows:
Gross Amounts
not Offset in the
Statement of
Net Amounts of Assets and Liabilities
Gross Amounts Assets Presented -----------------------
Gross Amounts of Offset in the in the Statement Collateral
Recognized Statement of Assets of Assets and Financial Amounts
Amounts Assets and Liabilities Liabilities Instruments Received Net Amount
---------------------------------------------------------------------------------------------------------------------
Forward Foreign
Currency Contracts* $ 939,717 $ -- $ 939,717 $ -- $ -- $ 939,717
* The respective counterparties for each contract are disclosed in the
Forward Foreign Currency Contracts table in the Portfolio of Investments.
Gross Amounts
not Offset in the
Net Amounts of Statement of
Liabilities Assets and Liabilities
Gross Amounts of Gross Amounts Presented in the -----------------------
Recognized Offset in the Statement of Collateral
Amounts Statement of Assets Assets and Financial Amounts
Liabilities and Liabilities Liabilities Instruments Received Net Amount
---------------------------------------------------------------------------------------------------------------------
Written Options $ 2,154,761 $ -- $ 2,154,761 $ -- $ -- $2,154,761
E. FOREIGN CURRENCY
The books and records of the Fund are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investments and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statement of Operations. Unrealized gains and losses on
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statement of Operations. Net realized foreign currency gains and losses
include the effect of changes in exchange rates between trade date and
settlement date on investment security transactions, foreign currency
transactions and interest and dividends received and are shown in "Net realized
gain/loss on foreign currency transactions" on the Statement of Operations.
The portion of foreign currency gains and losses related to fluctuation in
exchange rates between the initial purchase settlement date and subsequent sale
trade date is included in "Net realized gain (loss) on investments" on the
Statement of Operations.
Page 17
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 31, 2015
F. OPTION CONTRACTS
The Fund is subject to equity price risk in the normal course of pursuing its
investment objective and may write (sell) options to hedge against changes in
the value of equities. Also, the Fund seeks to generate additional income, in
the form of premiums received, from writing (selling) the options. The Fund may
write (sell) covered call options ("options") on a portion of the equity
securities held in the Fund's portfolio and on securities indices as determined
to be appropriate by the Advisor, and consistent with the Fund's investment
objective in an amount up to 40% of the value of its Managed Assets. The Fund
will write (sell) a call option on an individual security only if the Fund owns
the security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or, if additional
cash consideration is required, cash or other assets determined to be liquid by
the Advisor, the Sub-Advisor (in accordance with procedures approved by the
Board of Trustees) in such amount are segregated by the Fund's custodian) upon
conversion or exchange of other securities held by the Fund. Options on
securities indices are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security and are similar to options on single securities, except that
the exercise of securities index options requires cash settlement payments and
does not involve the actual purchase or sale of securities. The Fund will not
write (sell) "naked" or uncovered call options. If certain equity securities
held in the Fund's portfolio are not covered by a related call option on the
individual equity security, securities index options may be written on all or a
portion of such uncovered securities. Options are marked-to-market daily and
their value will be affected by changes in the value and dividend rates of the
underlying equity securities, changes in interest rates, changes in the actual
or perceived volatility of the securities markets and the underlying equity
securities and the remaining time to the options' expiration. The value of
options may also be adversely affected if the market for the options becomes
less liquid or trading volume diminishes.
Options the Fund writes (sells) will either be exercised, expire or be cancelled
pursuant to a closing transaction. If the price of the underlying equity
security exceeds the option's exercise price, it is likely that the option
holder will exercise the option. If an option written (sold) by the Fund is
exercised, the Fund would be obligated to deliver the underlying equity security
to the option holder upon payment of the strike price. In this case, the option
premium received by the Fund will be added to the amount realized on the sale of
the underlying security for purposes of determining gain or loss. If the price
of the underlying equity security is less than the option's strike price, the
option will likely expire without being exercised. The option premium received
by the Fund will, in this case, be treated as short-term capital gain on the
expiration date of the option. The Fund may also elect to close out its position
in an option prior to its expiration by purchasing an option of the same series
as the option written (sold) by the Fund.
The options that the Fund writes (sells) give the option holder the right, but
not the obligation, to purchase a security from the Fund at the strike price on
or prior to the option's expiration date. The ability to successfully implement
the writing (selling) of covered call options depends on the ability of the
Advisor to predict pertinent market movements, which cannot be assured. Thus,
the use of options may require the Fund to sell portfolio securities at
inopportune times or for prices other than current market value, which may limit
the amount of appreciation the Fund can realize on an investment, or may cause
the Fund to hold a security that it might otherwise sell. As the writer (seller)
of a covered option, the Fund foregoes, during the option's life, the
opportunity to profit from increases in the market value of the security
covering the option above the sum of the premium and the strike price of the
option, but has retained the risk of loss should the price of the underlying
security decline. The writer (seller) of an option has no control over the time
when it may be required to fulfill its obligation as a writer (seller) of the
option. Once an option writer (seller) has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver the underlying security to the
option holder at the exercise price.
Over-the-counter options have the risk of the potential inability of
counterparties to meet the terms of their contracts. The Fund's maximum equity
price risk for purchased options is limited to the premium initially paid. In
addition, certain risks may arise upon entering into option contracts including
the risk that an illiquid secondary market will limit the Fund's ability to
close out an option contract prior to the expiration date and that a change in
the value of the option contract may not correlate exactly with changes in the
value of the securities hedged.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
The Fund distributes to holders of its Common Shares monthly distributions of
all or a portion of its net income after the payment of interest in connection
with leverage used by the Fund. In addition to regular monthly distributions,
for two years following the Fund's initial public offering, the Fund intends to
pay quarterly distributions in cash to Common Shareholders if certain conditions
are met. Distributions of net realized capital gains earned by the Fund, if any,
are distributed at least annually. Distributions are automatically reinvested
into additional Common Shares pursuant to the Fund's Dividend Reinvestment Plan
unless cash distributions are elected by the shareholder.
Distributions from net investment income and realized capital gains are
determined in accordance with federal income tax regulations, which may differ
from U.S. GAAP. Certain capital accounts in the financial statements are
periodically adjusted for permanent differences in order to reflect their tax
character. These permanent differences are primarily due to the varying
treatment of income and gain/loss on portfolio securities held by the Fund and
have no impact on net assets or NAV per Common Share. Temporary differences,
which arise from recognizing certain items of income, expense and gain/loss in
different periods for financial statement and tax purposes, will reverse at some
point in the future. Permanent differences incurred during the year ended
Page 18
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 31, 2015
December 31, 2015, primarily a result of differing book and tax treatment on
realization of foreign currency gains (losses), have been reclassified at year
end to reflect a decrease to accumulated net investment income (loss) of
$142,752 and an increase to accumulated net realized gain (loss) of $142,752.
There was no change to paid-in-capital. Net assets were not affected by these
reclassifications.
The tax character of distributions paid during the fiscal period ended December
31, 2015, was as follows:
Distributions paid from: 2015
Ordinary income.............................. $ 2,085,061
As of December 31, 2015, the distributable earnings and net assets on a tax
basis were as follows:
Undistributed ordinary income................ $ 294,156
Undistributed capital gains.................. --
--------------
Total undistributed earnings................. 294,156
Accumulated capital and other losses......... --
Net unrealized appreciation (depreciation)... (115,785)
--------------
Total accumulated earnings (losses).......... 178,371
Other........................................ --
Paid-in capital.............................. 328,469,443
--------------
Net assets................................... $ 328,647,814
==============
H. INCOME TAXES
The Fund intends 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 December 31, 2015, the
Fund had no non-expiring capital loss carryforwards for federal income tax
purposes.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. The taxable year ended 2015
remains open for audit. As of December 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.
I. EXPENSES:
The Fund will pay all expenses directly related to its operations.
J. ORGANIZATION AND OFFERING COSTS
Organization costs consisted of costs incurred to establish the Fund and enable
it to legally conduct business. These costs included filing fees, listing fees,
legal services pertaining to the organization of the business and audit fees
relating to the initial registration and auditing the initial statement of
assets and liabilities, among other fees. Offering costs consisted of legal fees
pertaining to the Fund's shares offered for sale, registration fees,
underwriting fees, and printing of the initial prospectus, among other fees.
First Trust paid all organization expenses. The Fund's Common Share offering
costs of $660,000 were recorded as a reduction of the proceeds from sales from
the sale of Common Shares during the period ended December 31, 2015.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
services, First Trust is entitled to a monthly fee calculated at an annual rate
of 1.10% of the Fund's Managed Assets. First Trust also provides fund reporting
services to the Fund for a flat annual fee in the amount of $9,250.
Henderson Global Investors (North America) Inc. ("Henderson" or the
"Sub-Advisor") serves as the Fund's sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor receives a monthly
portfolio management fee calculated at an annual rate of 0.50% of the Fund's
Managed Assets that is paid by First Trust out of its investment advisory fee.
Page 19
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 31, 2015
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.
Computershare, Inc. serves as the Fund's transfer agent in accordance with
certain fee arrangements. As transfer agent, Computershare is responsible for
maintaining shareholder records for the Fund.
At a meeting on December 7, 2015, the Board accepted Mr. Bradley's resignation
from his position as President and Chief Executive Officer of the Fund,
effective December 31, 2015. At the same meeting, the Board elected Mr. Dykas,
formerly Chief Financial Officer and Treasurer of the Fund, to serve as the
President and Chief Executive Officer and Mr. Swade, formerly an Assistant
Treasurer of the Fund, to serve as the Treasurer, Chief Financial Officer and
Chief Accounting Officer of 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. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investments, excluding short-term
investments, for the period ended December 31, 2015, were $426,215,580 and
$17,460,206, respectively.
5. DERIVATIVE TRANSACTIONS
The following table presents the types of derivatives held by the Fund at
December 31, 2015, the primary underlying risk exposure and location of these
instruments as presented on the Statement of Assets and Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES
---------------------------------------------- ----------------------------------------------
DERIVATIVE STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND
INSTRUMENT RISK EXPOSURE LIABILITIES LOCATION VALUE LIABILITIES LOCATION VALUE
-------------------- ------------- ---------------------------------- ---------- ---------------------------------- ----------
Forward foreign Currency Risk Unrealized appreciation on Unrealized depreciation on
currency contracts forward foreign currency contracts $ 939,717 forward foreign currency contracts $ --
Written Options Equity Risk Options written, at value $ -- Options written, at value $2,154,761
The following table presents the amount of net realized gain(loss) and change in
net unrealized appreciation (depreciation) recognized for the period ended
December 31, 2015, on derivative instruments, as well as the primary underlying
risk exposure associated with each instrument.
STATEMENT OF OPERATIONS LOCATION
---------------------------------------------------------------------------
CURRENCY RISK EXPOSURE
Net realized gain (loss) on forward foreign currency contracts $ --
Net change in unrealized appreciation (depreciation) on forward
foreign currency contracts 939,717
EQUITY RISK EXPOSURE
Net realized gain (loss) on written option transactions (266,209)
Net change in unrealized appreciation (depreciation) on written
options held 1,553,030
During the period ended December 31, 2015, notional values of forward foreign
currency contracts opened and closed were $72,000,000 and $0, respectively.
Page 20
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 31, 2015
Written option activity for the Fund for the fiscal year-to-date period
(September 24, 2015 through December 31, 2015) was as follows:
NUMBER OF
WRITTEN OPTIONS CONTRACTS PREMIUMS
---------------------------------------------------------------------------
Options outstanding at September 24, 2015 -- $ --
Options Written 5,140 4,954,634
Options Expired (769) (761,322)
Options Exercised -- --
Options Closed (937) (485,521)
---------- -----------
Options outstanding at December 31, 2015 3,434 $ 3,707,791
========== ===========
6. BORROWINGS
The Fund has entered into a credit agreement with The Bank of Nova Scotia, which
provides for a revolving credit facility to be used as leverage for the Fund.
The revolving credit facility provides for a secured line of credit for the Fund
where Fund assets are pledged against advances made to the Fund. Under the
requirements of the 1940 Act, the Fund, immediately after any such borrowings,
must have an "asset coverage" of at least 300% (33-1/3% of the Fund's total
assets after borrowings). The total commitment under the facility is up to
$117,000,000. The borrowing rate under the revolving credit facility is equal to
the Euro rate of the 6-month LIBOR plus 77.5 basis points. As of December 31,
2015, the Fund had two loans outstanding under the revolving credit facility
totaling $89,113,498 (82,000,000 EUR). For the period ended December 31, 2015,
the average amount outstanding was $72,120,293 (66,142,857 EUR). The high and
low annual interest rates during the period ended December 31, 2015 were 0.7949%
and 0.7859%, respectively, and the weighted average interest rate was 0.7897%.
The interest rate at December 31, 2015 was 0.7859%. The Fund does not pay a
commitment fee unless the loan balance drops below 75% of total commitment,
which results in a fee of 0.25% and is included in "Interest and fees on loan"
on the Statement of Operations.
7. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
8. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Fund through
the date the financial statements were issued, and has determined that there
were the following subsequent events:
Effective January 1, 2016, the fixed annual retainer paid to the Independent
Trustees will be allocated equally among each fund in the First Trust Fund
Complex and will no longer be allocated pro rata based on each fund's net
assets.
On January 20, 2016, the Fund declared a distribution of $0.121 per Common Share
to Common Shareholders of record on February 3, 2016, payable February 16, 2016.
Page 21
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST DYNAMIC EUROPE EQUITY
INCOME FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust Dynamic Europe Equity Income Fund (the "Fund"), including the portfolio of
investments, as of December 31, 2015, and the related statements of operations,
changes in net assets, and cash flows and the financial highlights for the
period from September 24, 2015 (commencement of operations) through December 31,
2015. 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 audit.
We conducted our audit 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 audit 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 December 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 Dynamic Europe Equity Income Fund, as of December 31, 2015, and the
results of its operations, changes in its net assets, its cash flows and the
financial highlights for the period from September 24, 2015 (commencement of
operations) through December 31, 2015, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 23, 2016
Page 22
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 31, 2015 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by
Computershare Trust Company, N.A. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer shares
than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing Computershare, Inc., P.O.
Box 30170, College Station, TX 77842-3170.
--------------------------------------------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 will
be available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
Page 23
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 31, 2015 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
TAX INFORMATION
The Fund hereby designates as qualified dividend income 63.77% of its ordinary
income distributions (including short-term capital gains, if applicable) for the
year ended December 31, 2015. None of the ordinary income (including short-term
capital gain, if applicable) distributions made by the Fund during the year
ended December 31, 2015, qualify for corporate dividends received deduction
available to corporate shareholders.
The Fund meets the requirements of Section 853 of the Code, and elects to pass
through to its shareholders credit for foreign taxes paid. The total amount of
income received by the Fund from sources within foreign countries and
possessions of the United States is $2,374,555 (representing a total of $0.14
per share). The total amount of taxes paid to such countries is $168,724
(representing a total of $0.01 per share).
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some, but not all,
of the risks that should be considered for the Fund. For additional information
about the risks associated with investing in the Fund, please see the Fund's
prospectus and statement of additional information, as well as other Fund
regulatory filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions.
FOREIGN (NON-U.S.) SECURITIES RISK: Investing in securities of non-U.S. issuers
may involve certain risks not typically associated with investing in securities
of U.S. issuers. These risks include: (i) there may be less publicly available
information about non-U.S. issuers or markets due to less rigorous disclosure or
accounting standards or regulatory practices; (ii) non-U.S. markets may be
smaller, less liquid and more volatile than the U.S. market; (iii) potential
adverse effects of fluctuations in currency exchange rates or controls on the
value of the Fund's investments; (iv) the economies of non U.S. countries may
grow at slower rates than expected or may experience a downturn or recession;
(v) the impact of economic, political, social or diplomatic events; (vi) certain
non-U.S. countries may impose restrictions on the ability of non U.S. issuers to
make payments of principal and interest to investors located in the United
States due to blockage of non-U.S. currency exchanges or otherwise; and (vii)
withholding and other non-U.S. taxes may decrease the Fund's return.
EMERGING MARKETS RISK: Investments in securities of issuers located in emerging
market countries are considered speculative. In addition to the general risks of
investing in non-U.S. securities, heightened risks of investing in emerging
markets securities include: smaller market capitalization of securities markets,
which may suffer periods of relative illiquidity; significant price volatility;
restrictions on foreign investment; and possible restrictions on repatriation of
investment income and capital. Furthermore, foreign investors may be required to
register the proceeds of sales, and future economic or political crises could
lead to price controls, forced mergers, expropriation or confiscatory taxation,
seizure, nationalization or creation of government monopolies. The currencies of
emerging market countries may experience significant declines against the U.S.
dollar, and devaluation may occur subsequent to investments in these currencies
by the Fund. Inflation and rapid fluctuations in inflation rates have had, and
may continue to have, negative effects on the economies and securities markets
of certain emerging market countries.
EUROPEAN MARKETS RISK: Investing in Europe involves risks not typically
associated with investments in the United States. While many countries in Europe
are considered to have developed markets, investing in the developed countries
of Europe imposes different risks than those associated with investing in other
developed markets. Many countries in Europe are members of the European Union
("EU"), which faces major issues involving its membership, structure, procedures
and policies. Efforts of the member states to continue to unify their economic
and monetary policies may increase the potential for similarities in the
movements of European markets and may reduce any diversification benefit a Fund
may seek by investing in multiple countries within Europe. European countries
that are members of, or candidates to join, the Economic and Monetary Union
("EMU") (which is comprised of EU members that have adopted the Euro currency)
are subject to restrictions on inflation rates, interest rates, deficits and
debt levels, as well as fiscal and monetary controls. By adopting the Euro as
its currency, a member state relinquishes control over its own monetary
policies. As a result, European countries are significantly affected by fiscal
and monetary controls implemented by the EMU, and it is possible that the timing
Page 24
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 31, 2015 (UNAUDITED)
and substance of these controls may not address the needs of all EMU member
countries. In addition, the fiscal policies of a single member state can impact
and pose economic risks to the EU as a whole. Investing in Euro-denominated
securities also creates exposure to a currency that may not fully reflect the
strengths and weaknesses of the disparate economies that comprise Europe. There
is continued concern over national-level support for the Euro, which could lead
to certain countries leaving the EMU, the implementation of currency controls,
or potentially the dissolution of the Euro. The dissolution of the Euro would
have significant negative effects on European economies and would cause funds
with holdings denominated in Euros to face substantial challenges, including
difficulties relating to settlement of trades and valuation of holdings,
diminished liquidity, and the redenomination of holdings into other currencies.
FOREIGN CURRENCY RISK: The Fund will engage in practices and strategies that
will result in exposure to fluctuations in foreign exchange rates, thus
subjecting the Fund to foreign currency risk. The Fund's exposure to foreign
currencies or in securities or instruments that trade, or receive revenues, in
foreign currencies are subject to the risk that those currencies will decline in
value relative to the U.S. dollar or, in the case of hedging positions, that the
U.S. dollar will decline in value relative to the currency being hedged.
Currency rates in foreign countries may fluctuate significantly over short
periods of time for a number of reasons, including the forces of supply and
demand in the non-U.S. exchange markets, actual or perceived changes in interest
rates, rates of inflation, balance of payments and governmental surpluses or
deficits, intervention (or the failure to intervene) by U.S. or foreign
governments, central banks or supranational entities such as the International
Monetary Fund, or by the imposition of currency controls or other political
developments in the United States or abroad. These fluctuations may have a
significant adverse impact on the value of the Fund's portfolio and/or the level
of Fund distributions made to Common Shareholders. As noted above, the Fund will
seek to hedge exposure to reduce the risk of loss due to fluctuations in
currency exchange rates relative to the U.S. dollar. There is no assurance,
however, that these strategies will be available or will be successful and the
Fund will incur costs associated with such strategies.
GEOGRAPHIC CONCENTRATION RISK: The Fund may invest from time to time a
substantial amount of its assets in issuers located in a single country or
region. Investments in a single region, although representing a number of
different countries within the region, may be affected by common economic forces
and other factors. Because the Fund will concentrate its investments in this
manner, it assumes the risk that economic, political and social conditions in
those countries will have a significant impact on its investment performance.
This vulnerability to factors affecting European investments is significantly
greater than it would be for a more geographically diversified fund, and may
result in greater losses and volatility. This risk increases to the extent the
Fund focuses on issuers in a limited number of countries in Europe. Western
Europe has, in certain instances, been susceptible to serious financial
hardship, high debt levels and high levels of unemployment. The European Union
itself has experienced difficulties in connection with the debt loads of some of
its member states. In addition, the Fund's investment performance may also be
more volatile if it concentrates its investments in certain countries,
especially emerging market countries.
REAL ESTATE INVESTMENT TRUST (REIT) RISK: Investing in REITs involves certain
unique risks in addition to investing in the real estate industry in general.
REITs are subject to interest rate risk and the risk of default by lessees or
borrowers. REITs whose underlying assets are concentrated in properties used by
a particular industry are also subject to risks associated with such industry.
REITs may have limited financial resources, their securities may trade less
frequently and in a limited volume, and their securities may be subject to more
abrupt or erratic price movements than larger company securities.
LEVERAGE RISK: The use of leverage results in additional risks and can magnify
the effect of any losses. The funds borrowed pursuant to a leverage borrowing
program constitute a substantial lien and burden by reason of their prior claim
against the income of the Fund and against the net assets of the Fund in
liquidation. The rights of lenders to receive payments of interest on and
repayments of principal on any borrowings made by the Fund under a leverage
borrowing program are senior to the rights of holders of Common Shares with
respect to payment of dividends or upon liquidation. If the Fund is not in
compliance with certain credit facility provisions, the Fund may not be
permitted to declare dividends or other distributions, including dividends and
distributions with respect to Common Shares or purchase Common Shares.
MARKET DISRUPTION AND GEOPOLITICAL RISK: Some countries in which the Fund
invests have experienced security concerns, war or threats of war and
aggression, terrorism, economic uncertainty, natural and environmental disasters
and/or systemic market dislocations that have led, and in the future may lead,
to increased short term market volatility and may have adverse long term effects
on the European and world economies and markets generally, each of which may
negatively impact the Fund's investments. For example, there have been various
events throughout Europe, including Russia's annexation of Crimea and the
resulting sanctions against Russia, ongoing tension between Russia and Ukraine
and the political uncertainty and market turmoil in Greece, that have recently
had and may continue to have an adverse impact on European and global markets.
It is possible, for instance, that the events occurring in Russia could result
in, among other things, Russia withholding its natural gas supply from other
European countries, which has the potential to harm the economies and markets of
such countries. The events occurring in one country or region (including
non-European countries and regions) may spread through, or otherwise effect,
other countries and regions across Europe and therefore adversely impact the
Fund's investments in such countries and regions.
Page 25
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 31, 2015 (UNAUDITED)
REDENOMINATION RISK: Continuing uncertainty as to the status of the euro and the
EMU has created significant volatility in currency and financial markets
generally. Any partial or complete dissolution of the EMU could have significant
adverse effects on currency and financial markets, and on the values of the
Fund's portfolio investments. If one or more EMU countries were to stop using
the euro as its primary currency, the Fund's investments in such countries may
be redenominated into a different or newly adopted currency. As a result, the
value of those investments could decline significantly and unpredictably. In
addition, securities or other investments that are redenominated may be subject
to foreign currency risk, liquidity risk and valuation risk to a greater extent
than similar investments currently denominated in euros. To the extent a
currency used for redenomination purposes is not specified in respect of certain
EMU-related investments, or should the euro cease to be used entirely, the
currency in which such investments are denominated may be unclear, making such
investments particularly difficult to value or sell. The Fund may incur
additional expenses to the extent it is required to seek judicial or other
clarification of the denomination or value of such securities.
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AGREEMENT AND
SUB-ADVISORY AGREEMENT
The Board of Trustees of First Trust Dynamic Europe Equity Income Fund (the
"Fund"), including the Independent Trustees, approved the Investment Management
Agreement (the "Advisory Agreement") with First Trust Advisors L.P. ("First
Trust" or the "Advisor"), the Investment Sub-Advisory Agreement (the
"Sub-Advisory Agreement") among the Fund, the Advisor and Henderson Global
Investors (North America) Inc. (the "Sub-Advisor"), and the Investment
Sub-Sub-Advisory Agreement (the "Sub-Sub-Advisory Agreement") among the Fund,
the Advisor, the Sub-Advisor and Henderson Investment Management Limited (the
"Sub-Sub-Advisor" and, together with the Sub-Advisor, "Henderson"), for an
initial two-year term at a meeting held on July 27, 2015. The Sub-Sub-Advisory
Agreement, the Sub-Advisory Agreement and the Advisory Agreement are
collectively referred to as the "Agreements." The Board of Trustees determined
that the Agreements are in the best interests of the Fund in light of the extent
and quality of the services expected to be provided and such other matters as
the Board considered to be relevant in the exercise of its reasonable business
judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. To assist the Board in its evaluation of the Agreements, the
Independent Trustees received a separate report from each of the Advisor and
Henderson in advance of the Board meeting responding to a request for
information provided on behalf of the Independent Trustees that, among other
things, outlined the services to be provided by the Advisor and Henderson to the
Fund (including the relevant personnel responsible for these services and their
experience); the proposed advisory fee, sub-advisory fee and sub-sub-advisory
fee for the Fund as compared to fees charged by investment advisors to
comparable funds and as compared to fees charged to other clients of the Advisor
and Henderson; estimated expenses of the Fund as compared to expense ratios of
comparable funds; the nature of expenses to be incurred in providing services to
the Fund and the potential for economies of scale, if any; financial data on the
Advisor and Henderson; any fall-out benefits to the Advisor and Henderson; and a
summary of the Advisor's and Henderson's compliance programs. The Independent
Trustees also met separately with their independent legal counsel to discuss the
information provided by the Advisor and Henderson. The Board applied its
business judgment to determine whether the arrangements between the Fund and the
Advisor; the Fund, the Advisor and the Sub-Advisor; and the Fund, the Advisor,
the Sub-Advisor and the Sub-Sub-Advisor are reasonable business arrangements
from the Fund's perspective as well as from the perspective of shareholders.
In evaluating whether to approve the Agreements, the Board considered the
nature, extent and quality of services to be provided by the Advisor and
Henderson under the Agreements, and noted that employees of the Advisor provide
management services to other investment companies in the First Trust fund
complex with diligence and care. With respect to the Advisory Agreement, the
Board considered that the Advisor will be responsible for the overall management
and administration of the Fund and reviewed the services to be provided by the
Advisor to the Fund, including management of the option overlay strategy for the
Fund and the oversight of Henderson. The Board noted the compliance program that
had been developed by the Advisor and considered that it includes a robust
program for monitoring First Trust's Alternatives Investment Team's and
Henderson's compliance with the 1940 Act and the Fund's investment objective and
policies. The Board noted the efforts expended by the Advisor in organizing the
Fund and making arrangements for entities to provide services to the Fund. With
respect to the Sub-Advisory Agreement and the Sub-Sub-Advisory Agreement, the
Board noted the background and experience of Henderson's portfolio management
team and the Sub-Sub-Advisor's investment style, noting in particular that the
Sub-Advisor will be responsible for compliance oversight of the Sub-Sub-Advisor.
At the meeting, the Trustees received a presentation from representatives of
Henderson and were able to ask questions about Henderson and its proposed
investment strategies for the Fund. Henderson's representatives stated that
Henderson provides advisory services to other registered investment companies
and thus has familiarity with the requirements of the 1940 Act. Since the Fund
is newly organized, the Board could not consider investment performance of the
Fund. In light of the information presented and the considerations made, the
Board concluded that the nature, extent and quality of services to be provided
to the Fund by the Advisor, the Sub-Advisor and the Sub-Sub-Advisor under the
Agreements are expected to be satisfactory.
Page 26
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 31, 2015 (UNAUDITED)
The Board considered that First Trust proposed an advisory fee equal to the
annual rate of 1.10% of managed assets, and that out of this fee the Advisor
would pay the Sub-Advisor a fee equal to the annual rate of 0.50% of managed
assets allocated to the Sub-Advisor and the Sub-Advisor would pay the
Sub-Sub-Advisor a fee equal to the annual rate of 0.35% of those managed assets.
The Board reviewed data prepared by Management Practice, Inc. ("MPI"), an
independent source, showing the proposed advisory fee and the estimated expense
ratio assuming an asset level for the Fund as compared to the advisory fees and
expense ratios of a peer group comprised of the Fund and four other closed-end
funds investing in global or foreign equity securities with a focus on European
investment securities selected by MPI. The Board noted that the Fund's proposed
contractual advisory fee was higher than the median of the MPI peer group. The
Board also noted that none of the funds in the MPI peer group utilized an
advisor/sub-advisor management structure. The Board considered the proposed
sub-advisory fee rate and how it would relate to the overall management fee
structure of the Fund, noting that the fees to be paid to the Sub-Advisor would
be paid by the Advisor from its advisory fee and that the sub-sub-advisory fee
would be paid by the Sub-Advisor from its sub-advisory fee. The Board also
considered the terms of a proposed relationship agreement between the Advisor
and Sub-Advisor, which would expire four years after the date of the first
public offering of the Fund (the "Expiration Date"). The Board noted that under
the proposed terms of the relationship agreement, the Advisor would reimburse
the Sub-Advisor for a percentage of the Fund's underwriting and offering costs
paid by the Sub-Advisor in the event the Sub-Advisor is terminated prior to the
Expiration Date (except for certain defined events that constitute "termination
for cause"). The Board considered the Advisor's and Henderson's statements that
they do not provide investment advisory services to any funds that have similar
investment objectives and policies as the Fund. The Board also considered
information provided by Henderson as to the fees it charges to other funds
managed by the portfolio managers, noting that the Sub-Advisor's sub-advisory
fee for the Fund was lower than or equal to the fee Henderson charges to these
clients. On the basis of all the information provided on the fees and estimated
expenses of the Fund, the Board concluded that the advisory, sub-advisory and
sub-sub-advisory fees were reasonable and appropriate in light of the nature,
extent and quality of services expected to be provided by the Advisor, the
Sub-Advisor and the Sub-Sub-Advisor under the Agreements.
The Board considered the Advisor's representation that the proposed advisory fee
was not structured to pass the benefits of any economies of scale on to
shareholders. The Board noted that the Advisor has continued to invest in
personnel and infrastructure for the First Trust fund complex and noted that the
Advisor was unable to estimate the profitability of the Advisory Agreement to
the Advisor. The Board noted that Henderson also was unable to estimate the
profitability of the Sub-Advisory Agreement and the Sub-Sub-Advisory Agreement
to the Sub-Advisor and Sub-Sub-Advisor, respectively, and considered that the
sub-advisory and sub-sub-advisory fee rates were negotiated at arm's length with
unaffiliated third parties, and that the Advisor would pay the Sub-Advisor from
its advisory fee and the Sub-Advisor would pay the Sub-Sub-Advisor from its
sub-advisory fee. The Board considered fall-out benefits described by the
Advisor that may be realized from its relationship with the Fund, including the
Advisor's compensation for fund reporting services to be provided pursuant to a
separate Fund Reporting Services Agreement. The Board considered fall-out
benefits described by Henderson that may be realized from its relationship with
the Fund, noting that Henderson does not use soft-dollar arrangements other than
for proprietary research.
Based on all of the information considered and the conclusions reached, the
Board, including a majority of the Independent Trustees, as required by the 1940
Act, determined that the terms of the Agreements are fair and reasonable and
that the approval of the Agreements is in the best interests of the Fund. No
single factor was determinative in the Board's analysis.
Page 27
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BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 31, 2015 (UNAUDITED)
The Fund'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 FUND SERVICE(2) DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Three-Year Term Physician; President, Wheaton Orthopedics; 120 None
c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate
120 East Liberty Drive, o Since Fund Limited Partnership; Member, Sportsmed
Suite 400 Inception LLC
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Three-Year Term President, ADM Investor Services, Inc. 120 Director of ADM
c/o First Trust Advisors L.P. (Futures Commission Merchant) Investor Services,
120 East Liberty Drive, o Since Fund Inc., ADM
Suite 400 Inception Investor Services
Wheaton, IL 60187 International, and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Three-Year Term President, Hibs Enterprises (Financial 120 Director of Trust
c/o First Trust Advisors L.P. and Management Consulting) Company of
120 East Liberty Drive, o Since Fund Illinois
Suite 400 Inception
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Three-Year Term Managing Director and Chief Operating 120 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant
120 East Liberty Drive, o Since Fund Harapan Education Foundation (Educational Transport, Inc.
Suite 400 Inception Products and Services); President and Chief (May 2003 to
Wheaton, IL 60187 Executive Officer (June 2012 to September May 2014)
D.O.B.: 03/54 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 Three-Year Term Chief Executive Officer, First Trust 120 None
and Chairman of the Board Advisors L.P. and First Trust Portfolios
120 East Liberty Drive, o Since Fund L.P.; Chairman of the Board of Directors,
Suite 400 Inception BondWave LLC (Software Development
Wheaton, IL 60187 Company/Investment Advisor) and
D.O.B.: 09/55 Stonebridge Advisors LLC (Investment
Advisor)
-----------------------------
(1) Mr. Bowen is deemed an "interested person" of the Fund due to his position
as Chief Executive Officer of First Trust Advisors L.P., investment
advisor of the Fund.
(2) Currently, Richard E. Erickson and Thomas R. Kadlec, as Class II Trustees,
are serving as trustees until the Fund's 2018 annual meeting of
shareholders. James A. Bowen and Niel B. Nielson, as Class III Trustees,
are serving as trustees until the Fund's 2019 annual meeting of
shareholders. Robert F. Keith, as a Class I Trustee, is serving as a
trustee until the Fund's 2017 annual meeting of shareholders.
Page 28
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 31, 2015 (UNAUDITED)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(3)
------------------------------------------------------------------------------------------------------------------------------------
James M. Dykas President and Chief o Indefinite Term Managing Director and Chief Financial Officer
120 E. Liberty Drive, Executive Officer (January 2016 to Present), Controller (January 2011
Suite 400 o Since January 2016 to January 2016), Senior Vice President (April 2007
Wheaton, IL 60187 to January 2016), First Trust Advisors L.P. and First
D.O.B.: 01/66 Trust Portfolios L.P.
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P. and
120 E. Liberty Drive, Legal Officer First Trust Portfolios L.P.; Secretary and General
Suite 400 o Since Fund Inception Counsel, BondWave LLC (Software Development
Wheaton, IL 60187 Company/Investment Advisor); Secretary of
D.O.B.: 05/60 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 Fund Inception First Trust Advisors 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 L.P.
120 E. Liberty Drive, and Assistant Secretary and First Trust Portfolios L.P.
Suite 400 o Chief Compliance
Wheaton, IL 60187 Officer since
D.O.B.: 12/66 Fund Inception
o Assistant Secretary
since Fund Inception
Donald P. Swade Treasurer, Chief Financial o Indefinite Term Vice President (April 2012 to Present), First
120 E. Liberty Drive, Officer and Chief Trust Advisors L.P. and First Trust Portfolios L.P.,
Suite 400 Accounting Officer o Since January 2016 Vice President (September 2006 to April 2012),
Wheaton, IL 60187 Guggenheim Funds Investment Advisors,
D.O.B.: 08/72 LLC/Claymore Securities, Inc.
-----------------------------
(3) Officers of the Fund have an indefinite term. The term "officer" means the
president, vice president, secretary, treasurer, controller or any other
officer who performs a policy making function.
Page 29
--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 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 with affiliates of the Fund.
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 L.P.) or 1-800-222-6822 (First Trust
Advisors L.P.).
Page 30
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
Henderson Global Investors (North America) Inc.
737 North Michigan Avenue, Suite 1700
Chicago, Illinois 60611
ADMINISTRATOR,
FUND ACCOUNTANT &
CUSTODIAN
Brown Brothers Harriman & Co.
50 Milk Street
Boston, MA 02109
TRANSFER AGENT
Computershare, Inc.
P.O. Box 30170
College Station, TX 77842-3170
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.
(e) Not applicable.
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 each of the
last two fiscal years 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 $53,000 for 2013 and
$53,000 for 2014.
(b) Audit-Related Fees (Registrant) -- The aggregate fees billed in each
of the last two fiscal years, for assurance and related services by the
principal accountant that are reasonably related to the performance of the audit
of the registrant's financial statements and are not reported under paragraph
(a) of this Item were $0 for 2013 and $0 for 2014.
Audit-Related Fees (Investment Adviser) -- The aggregate fees billed in
each of the last two fiscal years of the registrant for assurance and related
services by the principal accountant that are reasonably related to the
performance of the audit of the registrant's financial statements and are not
reported under paragraph (a) of this Item were $0 for 2013 and $0 for 2014.
(c) Tax Fees (Registrant) -- The aggregate fees billed in each of the last
two fiscal years for professional services rendered by the principal accountant
for tax compliance, tax advice, and tax planning to the registrant were $5,200
for 2013 and $5,200 for 2014.
Tax Fees (Investment Adviser) -- The aggregate fees billed in each of the
last two fiscal years of the registrant for professional services rendered by
the principal accountant for tax compliance, tax advice, and tax planning to the
registrant's adviser were $0 for 2013 and $0 for 2014.
(d) All Other Fees (Registrant) -- The aggregate fees billed in each of
the last two fiscal years for products and services provided by the principal
accountant to the registrant, other than the services reported in paragraphs (a)
through (c) of this Item were $0 for 2013 and $0 for 2014.
All Other Fees (Investment Adviser) -- The aggregate fees billed in each
of the last two fiscal years for products and services provided by the principal
accountant to the registrant's investment adviser, other than services reported
in paragraphs (a) through (c) of this Item were $0 for 2013 and $0 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 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:
(b) 0%
(c) 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 for 2013 were $5,200
and $38,000 for the Registrant and the Registrant's investment adviser,
respectively and for 2014 were $5,200 and $8,500 for the Registrant and the
Registrant's investment adviser, respectively.
(h) The Registrant's audit committee of its Board of Trustees 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 trustees 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.
The Proxy Voting Policies are attached herewith.
HENDERSON INVESTMENT MANAGEMENT LIMITED
PROXY POLICIES AND PROCEDURES
AS OF JUNE 14, 2012
It is the intent of Henderson Investment Management Limited ("HIML") to vote
proxies in the best interests of the firm's clients. HIML believes that in order
to achieve long-term success, companies need not only to conceive and execute
appropriate business strategies, but also to maintain high standards of
corporate governance and corporate responsibility. We therefore expect companies
to operate according to recognised national and international standards in these
areas.
This policy sets out HIML's approach to corporate governance, corporate
responsibility and proxy voting.
1. Responsibilities
The Corporate Governance Manager at Henderson Global Investors, acting on
behalf of HIML, is responsible for the implementation of the Proxy Voting
Policies.
2. Service Providers
HIML has contracted ISS Europe Ltd. to provide policy development,
research, advisory and voting disclosure services.
Proxy voting services are provided by BNP Paribas Securities Services plc,
which provides a range of administrative services to Henderson. BNP
Paribas Securities Services plc is provided with voting services by ISS.
3. Voting Guidelines
HIML has adopted the Henderson Global Investors Responsible Investment
policy. This policy sets out Henderson's approach to monitoring and taking
action on financial performance, corporate governance and corporate
responsibility. The International Corporate Governance Policy is detailed
below.
3.1. International Corporate Governance Policy
International corporate governance systems vary a great deal according to
factors such as the legal system, the extent of shareholder rights and the
level of dispersed ownership. In formulating our approach to corporate
governance we are conscious that a 'one size fits all' policy is not
appropriate. We therefore seek to vary our voting and engagement
activities according to the market, and pay close attention to local
market codes of best practice.
Notwithstanding these differences, we consider that certain core
principles of corporate governance apply across all markets, and we seek
to apply these in our voting policy. The paragraphs below elaborate on
these core principles.
3.2. Corporate Objective
The overriding objective of the company should be to optimize over time
the returns to its shareholders. Where other considerations affect this
objective, they should be clearly stated and disclosed. To achieve this
objective, the company should endeavour to ensure the long-term viability
of its business, and to manage effectively its relationships with
stakeholders.
3.3. Disclosure and Transparency
Companies should disclose accurate, adequate and timely information, in
particular meeting market guidelines where they exist, so as to allow
investors to make informed decisions about the acquisition, ownership
obligations and rights, and sale of shares. Clear and comprehensive
information on directors, corporate governance arrangements and the
company's management of corporate responsibility issues should be
provided.
Shareholders should be given sufficient and timely information about all
proposals to allow them to make an informed judgment and exercise their
voting rights. Each proposal should be presented separately to
shareholders - multiple proposals should not be combined in the same
resolution. In the absence of sufficient information provided by a company
on a proposed resolution we will vote against.
3.4. Boards of Directors
Henderson recognises the plurality of corporate governance models across
different markets and does not advocate any one form of board structure.
However, for any corporate board there are certain key functions which
apply.
o Reviewing and guiding corporate strategy, major plans of action,
risk policy, annual budgets and business plans; setting performance
objectives; monitoring implementation and corporate performance; and
overseeing major capital expenditures, acquisitions and
divestitures.
o Monitoring the effectiveness of the company's governance practices
and making changes as needed.
o Selecting, compensating, monitoring and, where necessary, replacing
key executives and overseeing succession planning.
o Aligning key executive and board remuneration with the longer term
interests of the company and its shareholders.
o Ensuring a formal and transparent board nomination and election
process.
o Monitoring and managing potential conflicts of interest of
management, board members and shareholders, including misuse of
corporate assets and abuse in related party transactions.
o Ensuring the integrity of the corporation's accounting and financial
reporting systems, including the independent audit, and that
appropriate systems of control are in place, in particular, systems
for risk management, financial and operational control, and
compliance with the law and relevant standards.
o Overseeing the process of disclosure and communications.
The board of directors, or supervisory board, as an entity, and each of
its members, as an individual, is a fiduciary for all shareholders, and
should be accountable to the shareholder body as a whole. Each member
should stand for election on a regular basis.
Boards should include a sufficient number of independent non-executive
members with appropriate skills, experience and knowledge.
Responsibilities should include monitoring and contributing effectively to
the strategy and performance of management, staffing key committees of the
board, and influencing the conduct of the board as a whole.
Audit, remuneration and nomination/succession committees should be
established. These should be composed wholly or predominantly of
independent non-executives. Companies should disclose the terms of
reference of these committees and give an account to shareholders in the
annual report of how their responsibilities have been discharged. The
chairmen and members of these committees should be appointed by the board
as a whole according to a transparent procedure. When determining how to
vote on the election of a non-executive director, we will give close
consideration to their independence and to the proportion of independent
directors on the Board as a whole.
3.5. Shareholder Rights
All shareholders should be treated equitably. Companies' ordinary shares
should provide one vote for each share, and companies should act to ensure
the owners' rights to vote.
Major strategic modifications to the core business(es) of a company should
not be made without prior shareholder approval. Equally, major corporate
changes which in substance or effect materially dilute the equity or erode
the economic interests or share ownership rights of existing shareholders
should not be made without prior shareholder approval of the proposed
change. Such changes include modifications to articles or bylaws, the
implementation of shareholder rights plans or so called "poison pills",
and the equity component of compensation schemes.
We will not support proposals that have the potential to reduce
shareholder rights such as significant open-ended authorities to issue
shares without pre-emption rights or anti-takeover proposals unless
companies provide a compelling rationale for why they are in shareholder
interests.
3.6. Audit and Internal Control
Company boards should maintain robust structures and processes to ensure
sound internal controls and to oversee all aspects of relationships with
external auditors. The Audit Committee should ensure that the company
gives a balanced and clear presentation of its financial position and
prospects, and clearly explains its accounting principles and policies.
Audit Committee members should have appropriate levels of financial
expertise, in accordance with prevailing legislation or best practice. The
Audit Committee should ensure that the independence of the external
auditors is not compromised by conflicts of interest (arising, for
example, from the award of non-audit consultancy assignments).
Where we have serious concerns over auditor independence we will vote
against the re-election of the auditor.
3.7. Remuneration
Remuneration of executive directors and key executives should be aligned
with the interests of shareholders. Performance criteria attached to
share-based remuneration should be demanding and should not reward
performance that is not clearly superior to that of a group of comparable
companies that is appropriately selected in sector, geographical and index
terms. Requirements on directors and senior executives to acquire and
retain shareholdings in the company that are meaningful in the context of
their cash remuneration are also appropriate.
The design of senior executives' contracts should not commit companies to
'payment for failure'. Boards should pay attention to minimising this risk
when drawing up contracts and to resist pressure to concede excessively
generous severance conditions.
Companies should disclose in each annual report or proxy statement the
board's policies on remuneration - and, preferably, the remuneration of
individual board members and top executives, as well as the composition of
that remuneration - so that investors can judge whether corporate pay
policies and practices are appropriately designed.
Broad-based employee share ownership plans or other profit-sharing
programmes are effective market mechanisms that promote employee
participation.
When reviewing whether to support proposed new share schemes we place
particular importance on the following factors:
o the overall potential cost of the scheme, including the level
of dilution the issue price of share options relative to the
market price
o the use of performance conditions aligning the interests of
participants with shareholders the holding period i.e., the
length of time from the award date to the earliest date of
exercise the level of disclosure.
4. Voting Procedures
The procedure for casting proxy votes is as follows:
1. Custodians notify ISS of forthcoming company meetings and send proxy
materials.
2. ISS notifies Henderson of meetings via its ProxyExchange website.
3. ISS provides voting recommendations based on HIML's Proxy Voting
Policies.
4. The Corporate Governance Manager (or his designee) consults with
fund managers and analysts as appropriate.
5. The Corporate Governance Manager (or his designee) decides in
conjunction with the relevant fund managers and analysts whether to
accept or override the voting recommendations provided by ISS.
6. Voting instructions are sent to custodians via the ProxyExchange
website and executed by the custodians.
7. If at any time during implementation of the above procedures a
conflict of interest is identified the matter will be referred to
the HIML Proxy Committee via the Head of Compliance. In such
circumstances the Proxy Committee reviews the issue and directs ISS
how to vote the proxies through the ProxyExchange website and voting
instructions are executed by the custodians.
5. Share Blocking
In a number of markets in which the funds invest, shares must be suspended
from trading ('blocked') for a specified period before the Annual General
Meeting if voting rights are to be exercised. Such restrictions may place
constraints on portfolio managers that mean exercising proxy votes is not
in clients' interest. In other markets casting proxy votes may involve
costs that are disproportionate to any benefit gained. In markets where
share blocking applies or additional costs are incurred that outweigh the
potential benefits of voting, HIML will vote only in exceptional
circumstances.
6. Conflicts of Interest
For each director, officer and employee of HIML ("HIML person"), the
interests of HIML's clients must come first, ahead of the interest of HIML
and any person within the HIML organization, which includes HIML's
affiliates.
Accordingly, each HIML person must not put "personal benefit", whether
tangible or intangible, before the interests of clients of HIML or
otherwise take advantage of the relationship to HIML's clients. "Personal
benefit" includes any intended benefit for oneself or any other
individual, company, group or organization of any kind whatsoever except a
benefit for a client of HIML, as appropriate. It is imperative that each
of HIML's directors, officers and employees avoid any situation that might
compromise, or call into question, the exercise of fully independent
judgment in the interests of HIML's clients.
Occasions may arise where a person or organization involved in the proxy
voting process may have a conflict of interest. A conflict of interest may
exist if HIML has a business relationship with (or is actively soliciting
business from) either the company soliciting the proxy or a third party
that has a material interest in the outcome of a proxy vote or that is
actively lobbying for a particular outcome of a proxy vote. Any individual
with knowledge of an actual or potential conflict of interest relating to
a particular referral item shall disclose that conflict to the Head of
Compliance.
The following are examples of situations where a conflict may exist:
o Business Relationships - where HIML manages money for a company or
an employee group, manages pension assets or is actively soliciting
any such business, or leases office space from a company;
o Personal Relationships - where a HIML person has a personal
relationship with other proponents of proxy proposals, participants
in proxy contests, corporate directors, or candidates for
directorships;
o Familial Relationships - where a HIML person has a known familial
relationship relating to a company (e.g. a spouse or other relative
who serves as a director of a public company or is employed by the
company); and
o Fund Relationships - HIML may have a conflict because of a
relationship to fund shares held in client accounts (e.g., an entity
who receives fees from a fund is solicited by the fund to increase
those fees).
o Fund of Fund's Relationship - HIML may have a conflict where it
manages a fund of funds that invests in other affiliated Henderson
funds, and the underlying affiliated fund is soliciting votes for a
proxy.
It is the responsibility of each director, officer and employee of HIML to
report any real or potential conflict of interest to the Head of
Compliance who shall present any such information to the Proxy Committee.
However, once a particular conflict has been reported to the Head of
Compliance, this requirement shall be deemed satisfied with respect to all
individuals with knowledge of such conflict. In addition, all HIML persons
shall certify annually as to their compliance with this policy.
7. Proxy Committee
The Proxy Committee shall have three members, the Head of Equities, the
Corporate Governance Manager and the Head of Compliance (or their
respective designees). Proxy Committee meetings may be called by any
member of the Proxy Committee and shall be called whenever an actual or
potential conflict of interest is identified.
Two members of the Proxy Committee shall constitute a quorum and the Proxy
Committee shall act by a majority vote. The Proxy Committee shall keep
minutes of its meetings that shall be kept with the other corporate
records of HIML.
The Proxy Committee will review each item referred to it to determine if
an actual or potential conflict of interest indeed exists. If the Proxy
Committee determines that no actual or potential conflict exists, then the
proxy will be voted as it otherwise would have been under these
procedures. If the Proxy Committee determines that an actual or potential
conflict exists, then it will review the issue and instruct ISS to: (1)
vote based on ISS' recommendation, (2) vote in the same proportion as the
other shareholders, (3) abstain from voting entirely, (4) vote in
accordance with the recommendation of the investment professional
responsible for the account, or (5) vote in another manner as the Proxy
Committee deems fit. With respect to a conflict that arises due to (a) a
business transaction involving Henderson Group PLC and the company
soliciting the proxy, or (b) a Fund of funds relationship described above
only options (1)-(3) above shall be available.
For each matter where the Proxy Committee determines an actual or
potential conflict exists, the Proxy Committee will produce a Conflicts
Report that (1) describes the conflict of interest; (2) discusses the
procedures used to address such conflict of interest; and (3) discloses
any contacts from parties outside HIML (other than routine communications
from proxy solicitors) with respect to the referral item not otherwise
reported in a portfolio manager's recommendation. To the extent the Proxy
Committee instructs ISS to vote in accordance with the recommendation of
the investment professional responsible for the account, the Conflicts
Report will also include written confirmation that any recommendation from
an investment professional provided under circumstances where a conflict
of interest exists was made solely on the investment merits and without
regard to any other consideration.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS.
Information provided as of December 31, 2015
Henderson Global Investors (North America) Inc., a registered investment adviser
("HGINA" or the "Sub-Advisor"), is the Fund's sub-adviser and provides U.S.
regulatory and compliance oversight to the Fund and HIML (as defined below).
HGINA is a Delaware corporation and provides investment management services to
SEC-registered mutual funds, other pooled investment vehicles and institutional
accounts. The principal offices of HGINA are located at 737 North Michigan
Avenue, Suite 1700, Chicago, Illinois.
HGINA is an indirect, wholly-owned subsidiary of Henderson Group plc ("Henderson
Group"), which is the parent company of an asset management group. Henderson
Group, founded in 1934, is a global asset management firm providing a full
spectrum of investment products and services to institutions and individuals
around the world. The Advisor, the Sub-Advisor and the Fund have engaged
Henderson Investment Management Limited ("HIML" or the "Sub-Sub-Advisor"), a
registered investment adviser and an indirect, wholly-owned subsidiary of
Henderson Group, pursuant to an investment sub-advisory agreement among the
Fund, the Advisor, HGINA and HIML. Investment professionals of HIML render
portfolio management, research or trading services to certain clients of HGINA,
including the Fund. HIML will be responsible for the day-to-day investment
decisions of the Fund other than the Option Overlay Strategy.
The members of the portfolio management team responsible for the day-to-day
management of the Fund's investment portfolio other than the Option Overlay
Strategy are Alex Crooke and Ben Lofthouse. The members of the portfolio
management team responsible for implementing the Option Overlay Strategy are
John Gambla and Rob A. Guttschow.
1. ALEX CROOKE
HEAD OF GLOBAL EQUITY INCOME AT HENDERSON INVESTMENT MANAGEMENT
LIMITED ("HENDERSON")
Alex Crooke is a portfolio manager with more than 25 years of investment
management experience. Mr. Crooke is currently head of the Henderson Global
Equity Income team, which encompasses the firm's key equity income products.
Prior to joining Henderson, Alex was an Investment Analyst at Equitable Life
Assurance Society responsible for US Equity Research. In 1994, Mr. Crooke joined
Henderson as a Fund Manager and was responsible for UK and European Investments.
He was named Director of UK Investment Trusts in 2001. Mr. Crooke has managed
several funds during his 20 plus years at Henderson Global Investors, including
currently managing the Henderson Global Equity Income Fund, the Henderson
Dividend & Income Builder Fund, Henderson High Income Investment Trust and the
Bankers Investment Trust.
2. BEN LOFTHOUSE, CFA
PORTFOLIO MANAGER FOR THE GLOBAL EQUITY INCOME TEAM AT HENDERSON
Ben Lofthouse, CFA, is the portfolio manager of the Henderson Global Equity
Income Fund and the Henderson Dividend & Income Builder Fund, and has been a
member of the Henderson Global Equity Income team since 2004. In addition, Mr.
Lofthouse has co-managed the Global Equity Income OEIC since May 2012, and has
managed the Henderson International Income Trust plc since its launch in April
2011. Mr. Lofthouse joined Henderson in 2004 as an Investment Analyst and
Assistant Fund Manager having previously trained as a Chartered Accountant with
PricewaterhouseCoopers in its Banking and Capital Markets division. Mr. Crooke
also worked in the PricewaterhouseCoopers Business Recovery Services team.
3. JOHN GAMBLA, CFA
SENIOR PORTFOLIO MANAGER FOR THE ALTERNATIVES AND ACTIVE EQUITY INVESTMENT TEAM
AT FIRST TRUST ADVISORS L.P. ("FIRST TRUST")
Mr. Gambla has 20 years of investment experience, most recently as co-Chief
Investment Officer at the Nuveen HydePark Group LLC, a wholly-owned subsidiary
of Nuveen Investments. He graduated Phi Beta Kappa with a Bachelor of Science in
genetics and developmental biology (Cum Laude) and a Bachelor of Arts in finance
(departmental distinction) from the University of Illinois at Urbana/Champaign,
and earned an MBA from the University of Chicago's Graduate School of Business.
He is a CFA Charter holder and holds FRM and PRM designations.
4. ROB A. GUTTSCHOW, CFA
SENIOR PORTFOLIO MANAGER FOR THE ALTERNATIVES AND ACTIVE EQUITY INVESTMENT TEAM
AT FIRST TRUST
Mr. Guttschow has nearly 20 years of investment experience, most recently as
co-Chief Investment Officer at the Nuveen HydePark Group LLC, a wholly-owned
subsidiary of Nuveen Investments. Mr. Guttschow earned a Bachelor of Science
degree in engineering and an MBA from the University of Illinois at
Urbana/Champaign. He is a CFA Charter holder and a member of the CFA Society of
Chicago.
(a)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBER
AND POTENTIAL CONFLICTS OF INTEREST
Information provided as of December 31, 2015
# OF ACCOUNTS TOTAL ASSETS
MANAGED FOR WHICH FOR WHICH
TOTAL ADVISORY FEE IS ADVISORY FEE
NAME OF PORTFOLIO # OF ACCOUNTS TOTAL BASED ON IS BASED ON
MANAGER OR TEAM MEMBER TYPE OF ACCOUNTS MANAGED ASSETS PERFORMANCE PERFORMANCE
----------------
1. Alex Crooke Registered Investment 3 $3,997,765,345
Companies:
Other Pooled 3 $1,473,134,466 1 $289,862,116
Investment Vehicles:
Other Accounts:
2. Ben Lofthouse Registered Investment 3 $3,997,765,345
Companies:
Other Pooled 4 $ 995,381,605 1 $ 1,728,002
Investment Vehicles:
Other Accounts:
3. John Gambla Registered Investment 6 $ 294.2mm 0 0
Companies:
Other Pooled
Investment Vehicles:
Other Accounts: $ 0.6mm 0 0
4. Rob Guttschow Registered Investment 6 $ 294.2mm 0 0
Companies:
Other Pooled
Investment Vehicles:
Other Accounts: $ 0.6mm 0 0
POTENTIAL CONFLICTS OF INTERESTS
HENDERSON, POTENTIAL CONFLICTS OF INTERESTS
PORTFOLIO MANAGEMENT CONFLICTS OF INTEREST. Henderson has adopted a Code
of Ethics to ensure that those who have knowledge of portfolio transactions or
other confidential client information will not be able to act thereon to the
disadvantage of Henderson's clients. The Code of Ethics does not purport to
comprehensively cover all types of conduct or transactions which may be
prohibited or regulated by the laws and regulations applicable.
The portfolio managers responsible for managing the Funds may currently or
in the future also manage one or more other accounts. Other than potential
conflicts between investment strategies, the side-by-side management of a Fund
and other accounts may raise potential conflicts of interest due to certain
trading practices used by the portfolio manager (e.g., allocation of aggregated
trades). Henderson has policies and procedures reasonably designed to mitigate
these conflicts. The portfolio managers may advise certain accounts under a
performance fee arrangement. A performance fee arrangement may create an
incentive for a portfolio manager to make investments that are riskier or more
speculative than would be the case in the absence of performance fees.
PORTFOLIO MANAGEMENT COMPENSATION. The following is a summary of the
compensation received by Henderson's investment professionals for all accounts
managed and not just for the Fund. Henderson's investment professionals have
significant short and long-term financial incentives. In general, the
compensation plan is based on:
o Pre-defined, objective, measurable investment performance
o Performance goals that are ambitious, but attainable
o The plan provides an incentive for appropriately aggressive
portfolio management to achieve maximum feasible results within the
portfolio's risk return parameters.
The compensation structure consists of four primary elements. There is a
competitive base salary together with a short-term incentive bonus plan. In
addition, there are two further incentive-based packages for senior
international investment professionals that reward staff on both individual and
team performance, reflecting profitable asset growth. "Profitable asset growth"
refers to the increase in adviser revenues generated less the increase in costs.
It is typically calculated per adviser team on a calendar year basis. Members of
the relevant team receive a share of this growth, which is typically paid over a
three year period.
Some managers are granted an award in a long-term incentive program that
is based on several factors, including the profitability of Henderson Global
Investors. Additionally, some managers participate in the distribution of
performance-related fees if such funds are structured accordingly. Currently,
none of the Funds charge performance-related fees.
A summary of the compensation package is as follows:
o Basic Salaries: in line with or better than the industry average
o Short Term Incentive Bonus: the STI bonus is usually the majority of
the variable component, based largely on investment performance; for
a typical fund manager, it can vary between 50 percent and 150
percent of the salary
o Growth Equity Bonus Plan: the GEB is based on a team's contribution
to a rise in profits, it is designed to reward profitable asset
growth
o Long Term Incentive Plan: as described above
o Employee Share Plans: from year to year, managers may be able to
invest part of their remuneration in various share schemes which are
then partially matched by Henderson
o Performance-related fees: for some funds, any performance-related
fee earned by the firm is shared with individuals generating that
performance. If a performance-related fee applies, compensation is
based solely on performance and its terms are made public in the
fund's relevant disclosure document (i.e., prospectus or offering
memorandum). Performance-related fees may vary from fund to fund but
are typically measured over a one year period and compare the fund's
returns to either (i) a peer group, (ii) an index or (iii) an
absolute return.
FIRST TRUST, POTENTIAL CONFLICTS OF INTERESTS
First Trust and its affiliate, First Trust Portfolios L.P. ("FTP"), have in
place a joint Code of Ethics and Insider Trading Policies and Procedures that
are designed to (a) prevent First Trust personnel from trading securities based
upon material inside information in the possession of such personnel and (b)
ensure that First Trust personnel avoid actual or potential conflicts of
interest or abuse of their positions of trust and responsibility that could
occur through such activities as front running securities trades for the
Registrant. Personnel are required to have duplicate confirmations and account
statements delivered to First Trust and FTP compliance personnel who then
compare such trades to trading activity to detect any potential conflict
situations.
(a)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
Information provided as of December 31, 2015
ALEX CROOKE AND BEN LOFTHOUSE, HENDERSON
SALARY AND BENEFITS
Base salaries are set to be competitive with the market, and are set typically
within a band of +/- 5% of market median for the individual's role and
responsibilities, although salary levels at or around market upper quartile may
be awarded for key individuals with specialist skills, market knowledge and/or
who perform critical roles, to ensure that their fixed remuneration remains
market leading. Salary levels may be lower than market median for individuals
who are inexperienced or new to their role, but will be moved rapidly towards to
median and beyond where this is merited by individual performance. Base salaries
are set to be competitive with the market, and are periodically reviewed for
market competitiveness.
A range of benefits are provided to employees (including private medical
insurance, disability insurance and life insurance) with a view to offering an
overall remuneration package that is competitive to each local market in which
Henderson operates. Fringe benefits account for a small percentage of total
remuneration. Henderson also operates non-contributory pension schemes for
employees. With the exception of a small number of individuals who participate
in closed legacy defined benefits schemes, pension arrangements are all funded
on a defined contribution basis, with contribution levels being benchmarked to
the local market.
INCENTIVE ARRANGEMENTS FOR INVESTMENT PROFESSIONALS
Investment Management Incentive Plan (IMIP) IMIP is a short term incentive
variable pay (bonus) framework, which is designed to reward the contribution of
portfolio managers to increased profitability and quality asset growth. The
total incentive pool is based on a variable share of net management fees, taking
into account:
o A 'base' element - formed of a set percentage of management fees,
after deduction of direct salary and associated costs
o A 'performance' element (which can be positive or negative) -
determined as a variable share of management fees, depending on the
1 and 3 year track record of underlying funds
o A 'growth' element - determined as a set percentage of management
fees in the first 12 months from net inflows, offset by rebates and
commissions and subject to a clawback for net outflows
o A 'corporate' - determined as a variable share of management fees,
after deduction of direct salary and associated costs, with the
share dependent on the Group (STI) Balanced Scorecard outcome (see
below)
Performance fees
For some funds, performance-related fees earned by the firm are shared with the
individuals generating that performance in a transparent and agreed way.
Individual performance fee allocations are also subject to mandatory deferral
mechanisms and, in some cases, individuals are obliged to defer a proportion of
their performance fee incentives into their own funds.
Alternative Investment Management Fund Directive (AIFMD)
Henderson complies with AIFMD, which has impacted variable pay earned by
Henderson fund managers since January 1, 2015. The key implications are that, in
relation to variable remuneration earned in respect of AIFMD activities:
o The percentage of variable remuneration that must be deferred is
likely to increase (up to 60% of total variable pay for the highest
paid code employees).
o It will become mandatory for at least 50% of both deferred and
non-deferred variable remuneration to be delivered in
units/interests of the relevant funds.
In addition, within the Global Equities team the investment managers are
rewarded by their contribution to our clients' performance. A significant
portion of the end of year bonus pool is distributed to the investment managers
based on the performance attribution over a 1 and 3 year basis. This more
closely aligns the investment managers with the performance the team has
delivered to clients and rewards them for the return of the stocks they put in
the portfolio.
JOHN GAMBLA AND ROB GUTTSCHOW, FIRST TRUST
The compensation structure for John Gambla and Rob Guttschow is based upon a
fixed salary as well as a discretionary bonus determined by the management of
the Advisor. Salaries are determined by management and are based upon an
individual's position and overall value to the firm. Bonuses are also determined
by management and are generally based on a variety of factors, including, but
not limited to, an individual's overall contribution to the success of the firm
and the profitability of the firm.
(a)(4) DISCLOSURE OF SECURITIES OWNERSHIP
Information provided as of December 31, 2015
Name of Portfolio Dollar ($) Range of
------------------ --------------------
Manager or Fund Shares
----------- ------------
Team Member Beneficially Owned
----------- --------------------
Alex Crooke $0
Ben Lofthouse $0
John Gambla $0
Rob A. Guttschow $0
(b) Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
None.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial
officers, or persons performing similar functions, have concluded
that the registrant's disclosure controls and procedures (as defined
in Rule 30a-3(c) under the Investment Company Act of 1940, as
amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of
a date within 90 days of the filing date of the report that includes
the disclosure required by this paragraph, based on their evaluation
of these controls and procedures required by Rule 30a-3(b) under the
1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b)
under the Securities Exchange Act of 1934, as amended (17 CFR
240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act
(17 CFR 270.30a-3(d)) that occurred during the registrant's second
fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) 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 Dynamic Europe Equity Income Fund
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By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: February xx, 2016
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Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: February xx, 2016
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By (Signature and Title)* /s/ Donald P. Swade
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: February xx, 2016
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* Print the name and title of each signing officer under his or her signature.